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FEDERAL 
INCOME  TAX  PRIMER 

BASED  ON   REVENUE  ACT 

OF  1921  AND  ON  1922 

REGULATIONS 

BY 

COLEMAN    SILBERT 

OF  THE  BOSTON  BAR 


BOSTON 
FINANCIAL  PUBLISHING   COMPANY 

1922 


e54  8S>0 


Copyright  1922  by  Financial  Publishing  Co. 


J 

1  TABLE  OF  CONTENTS 


INCOME   TAX   ON   INDIVIDUALS 


Par.  Page 

List  of  abbreviations 1 

y,     1.    To  whom  it  applies 2 

Gross  or  Taxable  Income 

2.     General    definition 2 

-^3.     Certain    non-taxable   items 2 

jy  4.     Year  when  income  is  taxable_. 2 

W  ITEM:    INCOME  FROM  SALARIES,  WAGES, 

•  COMMISSIONS,  ETC. 

5.     Salaries:      Not    paid    in    cash  —  credited,    not    paid  — 

}  percentage    of    profits  —  contingent  —  gifts  —  trav- 

,                    eling    expenses 3 

an    6.     Salaries  of  wife  and  dependent  children 3 

7.  Non-taxable   salaries:     State   employees  —  Federal   em- 

ployees —  notary  public  fees 3 

8.  Bonuses  —  when  reported 4 

J    9.     Pensions  —  gratuities  —  military   pensions 4 

10      Expenses:     Daily  fares  and  meals  —  traveling  expenses  4 
ITEM:     INTEREST 

(n     11.     Interest   on   bank   deposits  —  coupons 4 

^^   12.     Non-Taxable    Interest:     State    bonds  —  Federal    Farm 
ffi  Loan    Bonds  —  Interest    from    building    and    loan 

V/                      associations — Tax-free    covenant    bonds    5 

'    13.     Bonds  sold  between  interest  dates 5 

ITEM:     INCOME   FROM   PARTNERSHIPS,   (PERSONAL 
SERVICE    CORPORATIONS),    AND    FIDUCIARIES 

14.     Partnerships:     Loss  in  the  business 5 

15.  Different    fiscal    years 5 

16.  Credits     5 

17.     Personal   Service   Corporations:     Different   fiscal   years  6 

18,     Credits     6 

19.     Fiduciaries :     Gifts 6 

20.  What  must  be  reported _^ 7 

21.  Revocable   trust 7 

22.  Different  fiscal  years 7 

23.  Credits     , 7 

ITEM:     INCOME  FROM  RENTS  AND  ROYALTIES 

24.  How  reported:  Lessor's  taxes  paid  by  lessee 7 

25.  Repairs     8 

26.  Depreciation     8 

27.  Other    expenses    ^ 8 

28.  Interest     .'  8 

29.  Taxes     8 

30.  Royalties      8 

31.  Loss  in  this  item 8 


ITEM:     PROFIT  OR  LOSS  FROM  BUSINESS  OR 

Par.                                            PROFESSION  Page 

32.  General  statement:  Personal  expenses 9 

33.  Compensation   for  services   extending   over   more   than 

one  year 9 

Total  Sales 

34.  Trade    discounts 9 

Materials  and  Supplies 

35.  Cash    basis 9 

Merchandise  Bought  for  Sale 

36.  Trade    discounts 9 

37.  Transportation  charges,  etc 9 

Inventory 

38.  Where    required _. . . .  10 

39.  What  included;      Unidentified   goods 10 

40.  How  figured:    Change  in  method •.:.•••  10 

Salaries  and  Wages 

41.  Reasonable  allowance  for  services  rendered 10 

42.  Own  salary,  wife's  and  children's 10 

43.  Not  paid  in  money 11 

44.  Increases   in   salary 11 

45.  Bonuses    11 

46.  Allowance  to  widow  of  employee 11 

47.  Traveling    expenses 11 

48 Rent    11 

Interest 

49.  Interest  deductible:  loans    secured    by    tax-exempt    se- 

curities —  overdue  taxes 11 

50.  Interest   not   deductible 11 

Taxes 

51.  Taxes    deductible:      Penalties 11 

52.  Taxes   not   deductible 12 

53 Repairs 12 

Wear  and  Tear 

54.  Depreciation:   Not  temporary  fluctuation 12 

55.  For  what  property:     Not  stocks  and  bonds  —  personal 

use 12 

56.  How  to  figure 13 

57.  When   taken '._. 13 

58.  Obsolescence    13 

58a.  Depletion     '. 13 

Losses 

59.  General    statement 13 

60.  Amount  of  loss 14 

61.  Year   taken 14 

62.     Special  provision 14 

62a.  Amortization    14 

Bad  Debts 

63.  To  what  applies 14 

64.  Two    methods 15 


Par.  Page 

65.  Charged    off    wholly 15 

66.  Charged  off  in  part. 15 

67.  When  charged   off .^ 15 

68.  Reserve  for  bad  debts 15 

69.  Secured    debts 15 

Other  Expenses 

70.  Capital    charges 16 

71.  Personal    expenses 16 

72.  Year  in  which   deducted 16 

73.  Insurance    17 

74.  Other   professional   expenses 17 

75.  Pensions    17 

76.  Allowance  to  widow  of  employee 17 

77.  Traveling   expenses 17 

78.  Damages  for  injuries 17 

Loss  in  Business 

79.  Effect  for  year 17 

80.  Deduction   of  net  loss   in  business   against  net  income 

of    later    years 17 

r  PROFIT  OR  LOSS  FROM  SALE  OF  REAL  ESTATE 
ITEMS:  \  PROFIT     OR     LOSS     FROM     SALE     OF     STOCKS, 
[  BONDS,  ETC. 

81.  General  statement:    Year  loss  or  profit  is  taken 19 

82.  No  gain  or  loss 19 

83.  Effect  of  depreciation  on  sale  or  disposition  of  property  19 

84.  When  made  on  sale  of  real  estate 20 

85.  Non-deductible    losses 20 

86.  Thirty-day    clause 20 

86a.  Short    sales 21 

87.  Tax-exempt    dividends , .  21 

88.  When  the  property  can't  be  identified 21 

Property  Bought  or  Acquired  On  or  After  March  1,  1913 

89.  Gain  on  property  bought  on  or  after  March  1,  1913 21 

90.  Loss  on  property  bought  on  or  after  March  1,  1913.  ...  22 

91.  Gain  on  gifts  acquired  from  living  persons  on  or  after 

March  1,  1913  and  before  January  1,  1921,  and  gifts 
acquired   by   inheritance  on   or  at   any   time   after 

March    1,    1913 22 

92.  Loss  on  gifts  acquired  from  living  persons  on  or  after 

March  1,  1913,  and  gifts  acquired  by  inheritance  on 

or  at  any  time  after  March  1,  1913 22 

93.  Gain  or  loss  on  gifts  acquired  from  living  persons  on 

or  after  January  1,  1921 22 

Property  Bought  or  Acquired  Before  March  1,  1913 

94.  Gain  on  property  bought  or  acquired  before  March  1, 

1913 23 

95.  Loss  on  property  bought  or  acquired  before  March  1, 

1913 23 

Special  Cases 

96.  Preferred  stock  with  common  as  bonus .,..  24 

97.  Sale  of  stock  after  stock  dividend 24 

98.  Stock   dividend    of   different   class    from   original   stock  25 

99.  Sale  of  unidentified  part  of  stock  dividend 25 

100.     Sale   of   rights 26 

100a.  Court   decision ^ 26 

V 


Par.  Gain  or  Loss  on  Exchange  Page 

101.  No  gain  or  loss ._ .^ 26 

102.  Rule  for  other  exchanges 27 

103.  New  property  substituted  for  old 27 

104.  When  property  received  on  non-taxable  exchange  is  of 

different    kinds 27 

105.  Where  part  of  property   received  on   exchange   has   a 

market  value  and  part  has  not 27 

106.  Sale  of  real  estate,  taking  purchase  mortgage 28 

107.     Foreclosure  sale  of  purchase  mortgage ••••  28 

108.     Property   destroyed,    stolen,   or   taken  by   eminent   do- 
main or  condemned ^ 28 

109.  Where  acquired  before   March   1,   1913 29 

110.  Liquidating    dividends 29 

111.  Sale  of  partnership  interest 29 

ITEM:     DIVIDENDS 

112.  How  taxed .^ 30 

113.  Definition 30 

114.  Federal  Reserve  Bank  dividends 30 

115.  Out  of  what  earnings 31 

116.  Stock    dividends 31 

117.  Other  dividends  not  in  cash 31 

118.  Dividends  by  insurance  companies  to  policyholders....  31 

ITEM:     INTEREST   FROM    LIBERTY    BONDS,   ETC. 

119.  Exempt    from    normal    tax 31 

120.  Credits  for  Liberty  Bonds  held  by  fiduciaries,  partner- 

ships and  personal  service  corporations 32 

121.  What   is   wholly   tax-exempt 32 

122.  Second,  Third  and  Fourth  Liberty  Bonds 32 

122a.  No  need  of  original  subscription 33 

123.  Victory    notes 33 

124.  Treasury   certificates   of   indebtedness 33 

125.  War   Savings    Certificates 33 

126.  War  Finance   Corporation    Bonds 33 

127.  How  to  compute  the  exemption 33 

ITEM:     OTHER  INCOME 

128.  What    included 33 

129.  Dividends  from  foreign  corporations 34 

DEDUCTIONS 

Interest 

130.  When    deductible 34 

131.  "Originally   subscribed" 34 

132.  Interest  on  taxes 35 

Taxes 

133.  General  rule 35 

134.  Estate  and  inheritance  taxes 35 

Losses 

135.  Which    deductible    here ^..  •  •  35 

136.  In  what  year  deducted 36 

137.  Deductible   and    non-deductible   losses 36 

138.  Amount  of  deduction 36 


Par.                                            Contributions  Page 

139.  When    deductible 36 

140.  By   partnership 36 

Bad  Debts 

141.  What    included ^1 

142.  Indorsers  and  sureties Zl 

Other  Deductions  Authorized  by  Law 

143.  Payments  to  beneficiaries  under  a  will Zl 

144.  Family  or  personal  expenses ^ 37 

COMPUTATION  OF  TAX 

145.  Net    income 38 

146.  Returns  for  less  than  a  year 38 

147.  Credits 38 

148.  Personal   exemption 38 

149.  How  much  a  "head  of  a  family"  must  contribute 39 

150.  Date  for  determining  amount  of  exemption 39 

151.  Normal   tax 40 

152.  Surtax     40 

153.  Elective  tax  on  profits  from  sale  of  capital  assets 40 

Credits  on  Tax 

154.  Tax  paid  at  source 41 

155.  Foreign  income  and  excess  profits  taxes 41 

Payment  of  Tax 

156.  When  due   41 

157.  How  made 42 

PARTNERSHIPS,  PERSONAL  SERVICE  CORPORATIONS, 
AND   FIDUCIARIES 

158.  Partnerships   42 

159.  Personal  service  corporations 42 

Fiduciaries 

160.  Definition    43 

161.  Returns    ^ 43 

162.  Expenses  of  administration 44 

163.  Trusts  with  same  founder  and  same  trustee,  returns  by 

trustee     44 

164.  Sale  of  capital  assets _^ 44 

165.  When  the  fiduciary  pays  the  tax 45 

166.  When  the  beneficiary  pays  the  tax 45 


PART   II. 
INCOME  TAX   ON   CORPORATIONS 

Miscellaneous  Provisions 

167.  Definition   of   corporation 46 

168.  Corporations  subject  to  the  tax 46 

169.  Tax-exempt  corporations ,  46 

vii 


Par.  Returns                                                  Page 

170.  By  what  corporations  made 47 

171.  When  and  where  made  and  by  whom  sworn  to 47 

172.  Consolidated  returns 48 

173.  Special  provision  for  related  trades  or  businesses 48 

174.  Returns   of   dividends 48 

GROSS  INCOME 

175.  General    statement ^ 48 

176.  Gross  sales ._^ 49 

177.  Cost  of  goods  sold 49 

178.  Gross  income  from  other  operations 49 

179.  Taxable  interest  on  obligations  of  the  U.  S.  and  War 

Finance   Corporation    Bonds 49 

180.  Other  taxable  interest 49 

181.  Rentals   ^. . .  49 

182.  Royalties    ^ 49 

183.  Earnings  from  Personal  Service  Corporations 49 

184.  Dividends    49 

185.  Income  from  other  sources SO 

DEDUCTIONS 

186.  Ordinary  and  necessary  expenses SO 

187.  Compensation  of  officers SO 

188.  Repairs SO 

189.  Interest    50 

190.  Taxes    SO 

191.  Bad  debts Si 

192      Wear  and  tear  (depreciation)  and  obsolescence SI 

193.  Depletion     ,..  SI 

194.  Amortization 51 

195.  Profit  or  loss  on  sale  of  capital  assets 51 

196.  Other  losses  51 

197.  Net  Loss  51 

198.  Dividends    52 

Computation  of  Tax 

199.  Credits  for  income  tax 52 

200.  Rates     52 

201.  No  elective  rate  on  profits  from  sale  of  capital  assets..  53 

202.  Evasion  of  surtaxes  by  incorporation S3 

203.  Return  for  less  than  a  year 53 

204.  Credits   against   tax 54 

205.  Payment  of  tax 54 

EXCESS-PROFITS  TAX 

206.  General    statement 54 

Computation  of  Invested  Capital,  Etc. 

207.  What  included  54 

208.  Excess-profits    credit    56 

209.  How  the  excess-profits  tax  is  computed 56 

210.  Examples 56 


PART    III. 

GENERAL  AND  MISCELLANEOUS  PROVISIONS 

Par.  Page 

211.  Name  of  Act  and  when  it  took  effect 58 

RETURNS 
Who  Must  File  a  Return  and  On  What  Forms 

212.  Net  income  of  $1,000  or  more 58 

213.  Net  income  of  $2,000  or  more 58 

214.  Returns  by  husband  and  wife 58 

215.  Combined  net  income  less  than  $2,000 59 

216.     Gross  income  of  $5,000  or  more 59 

217.     Husband    and   wife 60 

218.  Return  of  minor's  income 60 

219.  Returns  by  agent  or  guardian 60 

220.  Definition  of  net  income 60 

221.  Status    60 

222.  Forms 61 

223.  Forms  for  husband  and  wife. . . . 61 

224.  Method  of  return  by  husband  and  wife  may  be  changed  61 

225.  The  income  of  dependent  minors 61 

226.  Returns  by  executors  and  administrators 61 

227.  Returns    by    trustees 61 

228.  Returns   by   receivers 61 

229.  Related  trades  or  businesses 61 

Returns  of  Information  at  Source 

230.  Who  make    ^. 62 

231.  Fixed  or  determinable  income 62 

232.  What  items  need  not  be  reported 62 

233.  Where   made   out 62 

234.  Interest  on  bonds  of  domestic  or  foreign  corporations..  62 

235.  Income  withheld  from  nonresident  alien ,. .  63 

236.  "Foreign   items" .  63 

237.  Returns    by    brokers 63 

When  Returns  Must  Be  Filed 

238.  By    nonresident    aliens 63 

239.  Individual,  partnership  and  fiduciary  returns 63 

240.  Executors   and   administrators 63 

241.  Trustees    63 

242.  When  separate  return  for  less  than  twelve  months  is 

made    63 

243.  Date   of  mailing 63 

244.  Extensions    ^. 64 

245.  Where  returns  are  to  be  filed 64 

For  What  Period  Returns  Are  Filed 

246.  The  taxable  year 64 

247.  Choice  of  calendar  or  fiscal  year._^ 64 

248.  Change  in  accounting  period j_ 64 

249.  After    permission    granted... ._^...  64 

250.  Separate  return  caused  by  change...... 65 

Basis  of  Returns 

251.  Cash  or  accrual  basis 65 

252.  Constructive   receipt    65 

253.  When  inventories  are  required 66 

254.  Change  of  basis ^ 66 

ix 


Par.                                    Withholding  at  Source  Page 

255.  Eight  per  cent,  deduction _^ 66 

256.  Ten   per   cent,   deduction    (commencing   in    1922   twelve 

and  one-half  per  cent.) 66 

257.  Exceptions  to  withholding  in  Par.  255  and  Par.  256 66 

258.  Fixed  or  determinable  income 67 

259.  Annual  or  periodical ^.  67 

260.  Two  per  cent,  deduction 67 

261.  Exemption  from  2%   withholding 67 

262.  Owners    unknown 68 

263.  Ownership   certificates    68 

264.  Returns  by  withholding  agents 68 

Nonresident  Alien 

265.  Definition 69 

266.  Proof  of  residence  of  alien .^. 69 

267.  Duty  of  employers — returns  by  the  aliens 69 


PART   IV. 
ADMINISTRATIVE   PROVISIONS 

268.  Failure  to  file  return  on  time  and  fraudulent  returns...  70 

Payment  of  Tax 

269.  Extension  of  time 70 

270.  Where  taxpayer  about  to  leave  the  country,  etc 70 

Additional  Assessments 

271.  Penalties   and   interest 71 

272.  When  may  be  made 71 

273.  Income   of   decedent .._ 71 

274.  Notice  to  taxpayer,  appeal,  etc.;  understated  returns.....  72 

275.  Extension  of  time  for  payment 72 

276.  Examination  of  books Th 

Failure  To  Pay  Tax 

277.  Penalties    ^^ ^. . .  12> 

278.  What   constitutes   notice IZ 

Suits  By  Government 

279.  Time   limit ^.  74 

280.  Suits   against   stockholders -.  ••^'  74 

281.  Attachments,  etc ».. . .  74 

282.  Compromises    74 

Claims  for  Abatement 

283.  When  made  and  effect  of 74 

284.  Form  of 74 

Claims  for  Credit 

285.  Purpose    75 

286.  May  be  combined  with  claim  for  refund 75 

287.  Effect  of  claim  for  credit 75 

Refunds 

288.  When  must  be  made ^ 75 

289.  How  made   75 

X 


Par.  Page 

290.  To  whom  made .^ 75 

291.  On  examination  of  returns , .  76 

292.  Interest    76 

Suits  By  Taxpayers 

293.  Requirements  and  limitations 76 

294.  Against  whom  brought 76 

295.  Interest    .^ 11 

296.'  How  the  money  is  obtained  after  judgment 11 

297.  Injunctions     11 

Miscellaneous  Provisions 

298.  Regulations     ^ 77 

299.  Inspection  of  returns  and  copy 11 

300.  Hypothetical   questions 78 

301.  Committee  on  appeals  and  review 78 

302.  Registration  of  attorneys,  etc 78 

303.  Reopening  of  cases 78 

304.  Final  agreement   ^^ 78 


PART  V. 


DECISIONS  OF  THE  UNITED  STATES  SUPREME 
COURT  ON  INCOME  TAX  AND  RELATED  STATUTES 

SINCE  1913 

A.  Decisions  on  general  matters     79 

B.  Decisions  relating  to  taxable  and  non-taxable  income...  80 

C.  Decisions  relating  to  deductions     86 

D.  Decisions  relating  to  administrative  provisions    87 

E.  Excess-profits  tax  decision 88 


PART   VI. 

REVENUE  ACT  OF  1921. 
Titles  I,  II,  III,  XIII,  XIV. 

A.  Important  changes  and  new  provisions  in  the  Revenue 

Act  of  1921 89 

B.  Provisions    in    the    Revenue    Act   of    1921    not   applicable 

until   1922    , .  95 

C.  Provisions  in  the  Revenue  Act  of  1921  of  limited  duration  96 

D.  Text  of  Revenue  Act  of  1921:  Titles  I,  II,  III,  XIII,  XIV  97 


Index 159 


EXPLANATION  OF  ABBREVIATIONS 

Par. — Paragraph  of  this  book. 

Sec. — Section  of  Revenue  Act  of  1921. 

Art.— Article  of  Regulations  62,  1922. 

T.  D. — Treasury  Decision. 

Bull. — Cumulative  Bulletins  of  Decisions  of  Income  Tax 
Unit:    1,2,3,4. 

37-21-1098. — Reference  to  Weekly  Bulletins  issued  during 
1921  after  those  contained  in  Bulletins. 

I-l-l,  etc. — Reference  to  Weekly  Internal  Revenue  Bulletins 
commencing  in  1922. 

I.  T. — Income  Tax  Unit. 

Ct.  D. — Court  Decision. 

O.  D. — Office  Decision. 

O.  or  L.  O. — Solicitor's  Law  Opinion. 

S. — Solicitor's  Memorandum. 

Sol.  Op. — Solicitor's  Opinion. 

T.  B.  M. — Advisory  Tax  Board  Memorandum. 

T.  B.  R. — Advisory  Tax  Board  Recommendation.  The  Ad- 
visory Tax  Board  is  no  longer  in  existence. 

A.  R.  M. — Committee  on  Appeals  and  Review  Memorandum. 

A.  R.  R. — Committee  on  Appeals  and  Review  Recommenda- 
tion. 


INCOME  TAX  ON  INDIVIDUALS 

1.  To  whom  it  applies. — The  provisions  herein  stated  refer 
only  to  citizens  and  residents  of  the  United  States.  There 
are  special  provisions  for : 

(1)  Citizens  of  a  possession  of  the  United  States  (see 
Sec.  260  of  the  Act). 

(2)  Citizens  under  Sec.  262  of  the  Act. 

(3)  Nonresident  aliens  (see  in  particular  Sec.  217  of 
the  Act). 

Gross  or  Taxable  Income 

2.  General  definition. — Gross  income  includes  all  gains, 
profits  and  income  derived  from  any  business,  trade,  or  pro- 
fession, from  salaries  or  wages  or  compensation  for  personal 
service,  from  sales  or  dealings  in  any  kind  of  property,  from 
rent,  interest  dividends,  or  from  any  source  whatever  (Sec. 
213a  and  Art.  31). 

This  includes  income  from  within  as  well  as  from  without 
the  United  States  except  as  limited  in  the  special  cases  men- 
tioned in  Par.  1  (Art.  3). 

3.  Certain  non-taxable  items. — Gross  income  does  not  in- 
clude the  following  items : 

1.  Proceeds  of  life  insurance  policies  paid  on  death  of 
insured  (Sec.  213b  (1)  ). 

2.  The  amount  received  by  the  insured  not  in  excess 
of  premiums  paid  by  him  or  for  him  under  life  insurance, 
endowment,  or  annuity  contracts  (Sec.  213b  (2)  ).  For 
the  taxability  of  any  excess  see  Par.  128. 

3.  Property  acquired  by  gift  or  inheritance  (Sec.  213b 
(3)  ).    The  income  from  such  property  is  taxable. 

4.  Amounts  received  through  accident  or  health  insur- 
ance or  under  Workmen's  Compensation  Acts  plus  any 
damages  received  for  personal  injury  or  sickness  (Sec. 
213b  (6)  ). 

5.  Alimony  or  money  paid  under  separation  agree- 
ment (Art.  73). 

4.  Year  when  income  is  taxable. — If  returns  are  made  on 
a  cash  basis,  the  income  is  reported  for  the  year  when  it  is 
paid  or  credited  (Art.  52)  to  the  taxpayer.     If  income  is  re- 

2 


ported  on  an  accrual  basis,  it  is  reported  for  the  year  when  it 
accrues  (Art.  51).     See  Sec.  213a. 

Unliquidated  claims  are  income  for  the  year  when  liqui- 
dated by  payment,  judgment  or  agreement  (see  Art.  51.  See 
also  Par.  7Z). 

Contingent  claims  are  income  only  when  the  contingency 
has  occurred  (Bull.  3,  p.  142;  A.  R.  R.  232).  (See  also  Par. 
72.) 

Forms   1040,   1040A,  and   1041  (see  Par.  160) 

ITEM:     INCOME   FROM   SALARIES,   WAGES, 
COMMISSIONS,  ETC. 

5.  Salaries. — All  salaries  are  to  be  included,  even  those 
from  your  own  business  or  partnership.  If  you  are  paid  oth- 
erwise than  by  money,  wholly  or  in  part,  the  market  value 
of  what  you  receive  is  to  be  included  (Art.  33).  Salaries  are 
to  be  reported  for  the  year  when  credited  to  you  even  though 
received  later  (Art.  52).     See  also  Par.  ZZ. 

Salaries,  even  if  partly  non-deductible  as  a  business  ex- 
pense because  excessive  (Par.  41),  unless  they  are  to  be 
treated  wholly  or  in  part  as  dividends  or  capital  payments, 
must  be  reported  in  full  (Art.  106). 

A  salary  based  on  a  percentage  of  profits  is  to  be  included 
here  (Bull.  3,  p.  143 ;  A.  R.  R.  346). 

Salaries  which  are  purely  contingent  are  not  to  be  included 
until  the  contingency  has  taken  place  (Bull.  1,  p.  109;  O.  D. 
159). 

Gifts  are  not  to  be  included  (see  also  Par.  9).  Supper 
money  is  considered  a  gift  (Bull.  2,  p.  90;  O.  D.  514). 

For  traveling  expenses  see  Par.  10. 

6.  Salaries  of  wife  and  dependent  children. — Any  salary 
received  by  a  wife  should  be  reported  as  part  of  the  husband's 
income  or  preferably  on  a  separate  return,  or  joint  return 
with  the  husband  (Art.  401). 

The  salaries  or  wages  of  dependent  minor  children  should 
be  included  in  the  parent's  return  (Art.  403). 

7.  Non-taxable  salaries. — Salaries  of  officers  or  employees 
of  a  State,  County,  City  or  Town,  or  any  political  subdivision 
of  a  State,  are  not  taxable  (Art.  88).  Salaries  of  Federal  em- 
ployees are  taxable  (Art.  32). 

The  fees  of  a  notary  public  are  not  taxable  (Art.  88). 

3 


8.  Bonuses. — Any  bonus  given  during  the  term  of  service 
or  at  the  end  is  to  be  reported  as  far  as  it  does  not  exceed 
reasonable  compensation  when  added  to  the  regular  salary. 
Any  part  over  this  would  be  a  gift.  In  this  case,  of  course, 
the  excess  would  not  be  deductible  as  an  expense  of  the  busi- 
ness (see  Par.  45)  (Art.  107). 

Of  course  whatever  should  be  here  reported  is  deductible 
as  a  business  expense  (see  Par.  45)  and  vice-versa;  but  the 
fact  that  the  employer  does  not  deduct  it  does  not  mean  that 
the  employee  should  not  return  it  if  the  bonus  is  allowable  as 
salary  (Bull.  3,  p.  144;  O.  D.  570). 

The  bonus  must  be  paid  or  credited  during  the  taxable 
year  (Bull.  2,  p.  Ill ;  O.  D.  497). 

9.  Pensions. — Pensions  paid  to  retired  employees  are  to  be 
reported  (Art.  108). 

Pensions  paid  to  others  are  gifts  and  not  income  (Art.  32). 

All  allotments,  allowance  and  pensions  to  those  who  served 
in  the  military  or  naval  service  of  the  United  States  or  to 
their  beneficiaries  need  not  be  reported  (Sec.  213b  (9)  ). 

10.  Expenses. — Fares  expended  in  going  to  and  from  work 
are  not  deductible  (Art.  101a)  ;  neither  is  money  spent  in  town 
for  meals;  see  Par.  71. 

Those  who  have  to  pay  traveling  expenses  out  of  their 
salaries  are  allowed  to  deduct  them  in  full.  Those  who  in 
addition  to  their  salaries  are  repaid  their  actual  expenses 
return  the  payments  as  income  and  deduct  them  as  expenses. 
Where  any  lump  sum  or  per  diem  allowance  exceeds  the 
actual  expenditures,  the  excess  is  to  be  reported  as  income 
(Art.  292). 

Traveling  salesmen  claiming  deductions  must  make  out  a 
statement  and  attach  it  as  part  of  the  return.  The  actual 
records  of  the  expenditures  may  be  called  for  (Art.  292). 

ITEM:     INTEREST 

(For  interest  on  Liberty  Bonds,  etc.,  see  below) 

11.  Interest  on  bank  deposits,  etc. — This  is  income  for  the 
year  when  credited  on  the  books  (Art.  53). 

Likewise  interest  coupons  when  due  and  payable  are  in- 
come, even  though  not  yet  cashed  (Art.  53).  If  defaulted  they 
are  income  when  paid  (Art.  53). 

4 


12.  Non-taxable  interest. —  (1)  The  interest  on  State  bonds 
or  any  political  subdivision  thereof  or  the  District  of  Colum- 
bia (213b  (4)  ). 

(2)  Interest  on  Federal  Farm  Loan  Bonds  (Sec.  213b  (4)  ). 

(3)  Interest  not  in  excess  of  $300  received  from  1922-1926 
as  dividends  or  interest  from  mutual  domestic  building  or 
loan  associations  (Sec.  213b  (10)  ). 

•    (4)   Interest  accrued  before  March  1,  1913  (Art.  90). 

None  of  these  items  need  be  reported  on  the  return. 

All  the  interest  from  tax-free  covenant  bonds  is  to  be  re- 
ported (Sec.  221d)  ;  for  credit  for  taxes  paid  at  source,  see 
Par.  154. 

Taxes  paid  on  interest  from  tax-free  covenant  bonds  are  not 
taxable  income  (Sec.  234a  (3)  ). 

13.  Bonds  sold  between  interest  dates. — When  the  price  is 
plus  accrued  interest  the  seller  reports  the  interest  for  the 
period  he  held  the  bond  and  the  purchaser  for  the  period  he 
holds  the  bond  (Bull.  3,  p.  90;  Sol.  Op.  46). 

ITEM:     INCOME    FROM    PARTNERSHIPS,    (PER- 
SONAL SERVICE  CORPORATIONS)   AND 
FIDUCIARIES 

(For  partnerships  generally  see  Par.  158) 

14.  Partnerships. — Partnerships  themselves  are  not  taxed. 
A  partner  must  return  whatever  income  he  received  and  his 
share  of  any  profit  he  is  entitled  to,  even  though  it  is  not 
distributed  (Sec.  218a).  Of  course  if  he  pays  one  year  on 
any  profit  not  distributed  he  does  not  have  to  pay  on  it  again 
when  he  receives  it  (see  Art.  1570).  If  there  is  a  loss'  in  the 
business  his  share  of  the  loss  should  be  entered  and  subtracted 
from  any  gains  in  the  return  (Art.  332). 

15.  Different  fiscal  years. — If  the  partnership  year  is 
dififerent  from  the  partner's,  he  returns  his  share  for  the 
entire  partnership  year  which  ends  before  his  (Sec.  218a). 

For  the  fiscal  years  1920-1  and  1921-2  there  is  an  ad- 
justment of  the  taxes  because  of  the  different  Revenue 
Acts  and  rates  (Sec.  205c  and  Arts.  334  and  335). 

16.  Credits. — From  the  profit  of  the  partnership  there 
must  be  deducted  his  percentage  of  the  interest  received 

5 


from  Liberty  Bonds  held  by  the  partnership  and  also  of 
dividends  from  corporations  received  by  the  partnership. 
That  is,  if  he  gets  one-third  of  the  profits,  he  deducts  from 
•  his  profits  one-third  of  such  interest  and  dividends.  What 
is  left  from  his  share  of  the  profits  after  this  deduction  is 
entered  in  this  item  (Sec.  218b). 

(For  Personal  Service  Corporations  generally  see  Par.  159) 

17.  Personal  service  corporations. — They  are  not  them- 
selves taxed  until  Jan.  1,  1922.  Until  then  they  are  treated 
like  partnerships.  Therefore  each  stockholder  must  return 
any  dividends  he  received  plus  his  share  of  the  profits  not 
distributed  at  the  end  of  the  fiscal  year  of  the  corporation 
ending  at  the  same  time  with  or  before  his  own  (Sec.  218d). 
This  applies  to  earnings  accumulated  from  1918-1921 ;  earn- 
ings from  Feb.  28,  1913  to  Jan.  1,  1918  are  returned  as  divi- 
dends; see  Par.  113  (Sec.  201a). 

For  the  fiscal  year  1920-1  see  Art.  337. 

For  the  fiscal  year  1921-2,  there  is  an  adjustment,  as  com- 
mencing with  Jan.  1,  1922  it  will  be  treated  like  an  ordinary 
corporation,  and  the  members  will  be  taxed  only  upon  divi- 
dends declared  (Sec.  218d  and  Article  338). 

18.  Credits. — From  his  share  the  stockholder  may  de- 
duct his  proportionate  share  of  the  interest  on  Liberty 
Bonds  owned  by  the  corporation  and  also  of  dividends  re- 
ceived by  the  corporation.  If  he  owns  five  per  cent,  of  the 
stock,  he  deducts  five  per  cent,  of  such  interest  and  divi- 
dends from  his  share  of  the  earnings.  What  is  left  after 
the  deduction  is  entered  in  this  item  (Sec.  218d).  See  also 
Art.  339. 

(For  fiduciaries  generally  see  commencing  at  Par.  160) 

19.  Fiduciaries. — Any  income  received  from  a  fiduciary, 
i.  e.,  a  trustee,  receiver,  executor,  or  administrator,  must  be 
here  reported.  Of  course  if  the  income  is  such  that  the  tax 
has  already  been  paid  by  the  trustee  (see  Par.  165),  the  bene- 
ficiary need  not  pay  on  it  again  (Art.  344),  and  so  should  not 
return  this.  Any  legacies  or  gifts  are  not  to  be  reported; 
only  the  income  from  them  which  is  taxable  to  the  beneficiary 
(Sec.  213b  (3)  ). 

6 


20.  What  must  be  reported. — Any  income  to  be  dis- 
tributed at  regular  intervals,  as  every  year,  etc.,  must  be 
reported  and  the  tax  on  it  paid  by  the  beneficiary.  It  makes 
no  difference  whether  it  is  received  or  not.  Also  any  in- 
come, given  or  credited,  from  an  executor  or  administrator 
is  taxed  to  the  beneficiary.  In  the  latter  case  note  that  it 
must  be  received  or  credited.  In  the  former  case  it  is  to  be 
taxed  if  it  is  accumulated  in  the  trust,  even  though  not 
paid  or  credited  (Sec.  219d). 

These  are  the  only  two  kinds  of  income  from  trusts  or 
estates  to  be  returned  by  the  beneficiary  except  that  any 
income  collected  by  a  guardian  of  a  minor  is  to  be  reported 
by  the  minor  (Sec.  219d)  and  see  next  Par.  21. 

21.  Revocable  trusts. — Where  the  person  establishing  a 
trust  reserves  the  right  to  revoke  it,  the  trust  is  not  treated 
as  a  unit  for  purposes  of  computing  the  tax,  and  all  of  its 
taxable  income  is  included  as  part  of  the  taxable  income  of 
the  person  who  established  the  trust  (Art.  341).  The  trus- 
tee in  such  a  case  merely  makes  a  return. 

22.  Different  fiscal  years. — If  the  fiscal  year  of  the  bene- 
ficiary is  different  from  that  of  the  trust  or  estate,  he  makes 
the  return  of  all  income  received  during  the  fiscal  year  of 
the  trust  or  estate  ending  before  his  own  (Sec.  219d  and 
Art.  345). 

23.  Credits. — The  beneficiary  does  not  get  any  additional 
personal  exemption  (Par.  148)  because  he  receives  income 
from  one  or  more  trusts  (Art.  346).  He  is  allowed  to  de- 
duct for  the  normal  tax  any  interest  on  Liberty  Bond  or 
dividends  included  in  the  income  taxable  to  him  and  only 
the  balance  is  reported  here  (Sec.  219d). 

Example:  A  trust  has  income  of  $15,000.  Dividends 
and  interest  on  Liberty  Bonds  amount  to  $800.  Of  this 
income  $9,000  is  taxable  to  the  trustee.  In  this  part  sup- 
pose $500  of  the  interest  and  dividends  are  included  and 
the  balance  $300  are  included  in  the  $6,000  taxable  to  the 
beneficiary.    The  beneficiary  would  here  enter  only  $5,700. 

ITEM:    INCOME  FROM  RENTS  AND  ROYALTIES 
24.     How  reported. — The  rent  need  not  be  reported  sep- 
arately for  each  tenant  or  source,  unless  $1,000  or  over  an- 
nually is  received. 

7 


Taxes  assessed  to  the  landlord  and  paid  by  the  tenant  are 
to  be  returned  as  additional  rent  (Art.  109). 

For  income  by  reason  of  new  buildings,  etc.,  put  up  by  a 
lessee  which  belong-  to  the  lessor  see  Art.  48. 

25.  Repairs. — See  Par.  53.  Where  a  single  home  is  occu- 
pied by  the  owner,  no  deduction  for  repairs  may  be  made.  If 
it  is  a  double  house  of  which  the  owner  occupies  one 
part,  one-half  may  be  deducted,  etc.  (see  Art.  162;  see  also 
Bull.  37-21,  p.  7;  O.  D.  1026). 

26.  Depreciation. — See  commencing  at  Par.  54.  It  may  be 
here  added  that  ordinarily  3-4%  may  be  deducted  for  a  wooden 
building  and  2-3%  for  a  brick  building.  Where  the  owner 
occupies  the  whole  or  part  of  a  house,  the  same  rule  as  to  how 
much  can  be  deducted  for  depreciation  applies  as  in  the  case 
of  repairs  (Par.  25),  (Art.  162).  When  such  property  is  sold 
only  the  depreciation  if  any  that  it  was  permissible  to  deduct 
will  be  added  to  the  sale  price  (see  Par.  83).     (Art.  1561). 

27.  Other  expenses. — Premiums  for  fire  or  accident  insur- 
ance may  be  deducted.  Where  the  owner  occupies  the  whole 
or  any  part,  the  same  rule  as  to  how  much  may  be  deducted 
for  expenses  applies  as  in  the  case  of  repairs  (Par.  25)  and 
depreciation  (Par.  26).     (See  Aft.  291.) 

28.  Interest. — All  interest  paid  in  connection  with  real 
estate  may  be  deducted,  no  matter  whether  the  owner  oc- 
cupies or  not  (Sec.  214a  (3)  ). 

29.  Taxes. — All  taxes  paid  on  the  property  may  be  de- 
ducted, no  matter  whether  the  owner  occupies  or  not  (Sec. 
214a  (4)  ). 

Taxes  paid  for  the  landlord  by  the  tenant  are  deductible  by 
the  landlord  (Art.  109). 

30.  Royalties. — This  is  the  income  on  patents,  copyrights, 
etc.  (see  Art.  541).  The  cost  of  securing  the  patent  or  copy- 
right is  not  a  deductible  expense  (Art.  293).  Depreciation  is 
allowed  to  be  deducted  computed  as  shown  in  Par.  56. 

31.  Loss  in  this  item. — If  there  is  a  loss  in  this  item  enter 
it  as  a  minus  and  deduct  it  from  gains  in  other  items,  if  any. 


ITEM:     PROFIT  OR  LOSS  FROM  BUSINESS  OR 
PROFESSION 

32.  General  statement. — It  must  be  borne  constantly  in 
mind  that  we  are  dealing  in  this  schedule  with  income  from 
a  business  or  trade  or  profession.  In  particular  it  must  be 
remembered  that  the  various  deductions  for  expenses  are  al- 
lowed only  insofar  as  incurred  in  such  business,  trade  or  pro- 
fession. Personal  expenses  cannot  be  deducted  in  this  sched- 
ule nor  in  any  other  (see  Par.  71). 

33.  Compensation  for  services  extending  over  more  than 
one  year. — Where  one  lump  sum  is  paid  for  services  extend- 
ing over  more  than  one  year,  it  will  be  income  for  the  year  it 
is  so  paid,  and  those  paying  it  may  deduct  it  only  in  that  year. 
This  applies  to  lawyer's  fees.  If,  however,  the  contract  can  be 
said  to  be  divisible  so  that  a  distinct  part  is  chargeable  to  a 
particular  year  and  a  separate  bill  was  rendered  or  was  ren- 
derable,  those  reporting  on  an  annual  basis  may  report  such 
parts  separately  each  year  and  those  incurring  the  expense 
must  deduct  it  each  year  (Art.  32  and  Bull.  4,  p.  98;  Ct.  D. 
10).    See  also  1-3-29;  A.  R.  R.  702. 

Total  Sales 

34.  Trade  discounts. — Trade  discounts  actually  taken  will 
be  deducted  from  the  sale  price  either  directly  or  by  way  of 
a  separate  account. 

In  one  case  it  has  been  held  that  such  deduction  for  the  past 
year  may  be  made  any  time  up  to  the'  time  of  the  making  of 
the  return  (Bull.  1,  p.  221 ;  O.  D.  146). 

Materials  and  Supplies 

35.  Cash  basis. — If  the  business  is  one  where  no  inventory 
is  required  and  is  run  on  a  cash  basis,  you  may  include  here 
the  cost  of  all  materials  and  supplies  whether  used  or  not 
(Art.  102).    This  applies  to  professional  men  (Art.  104). 

Merchandise  Bought  for  Sale 

36.  Trade  discounts. — In  figuring  cost  trade  discounts 
taken  must  be  deducted  (Art.  1583). 

37.  Transportation  charges,  etc.  Costs  of  transportation 
and  other  like  charges  may  be  figured  in  as  part  of  the  cost  of 
the  merchandise  (Art.  1583). 

9 


Inventory 

38.  Where  required. — In  all  businesses  dealing  with  the 
production,  purchase  or  sale  of  merchandise,  inventories  are 
required  to  be  made  at  the  beginning  of  the  year  and  at  the 
end  of  the  year.  Form  1126  must  be  filled  out  and  filed  with 
the  return  (Art.  1581). 

39.  What  included. — Only  goods  to  which  the  taxpayer 
has  title  are  to  be  included.  Goods  consigned  are  to  be  in- 
cluded. It  makes  no  difference  where  the  goods  are.  Goods 
sent  F.  O.  B.  shipping  point  to  the  taxpayer  are  to  be  in- 
cluded, even  while  in  transit.  Goods  sent  by  the  taxpayer 
F.  O.  B.  shipping  point  are  not  to  be  included  (Art.  1581). 

All  goods  whether  finished  or  not  are  to  be  included  (Art. 
1581). 

If  the  goods  are  mixed  up  so  that  it  cannot  be  determined 
what  invoices  they  go  with,  they  are  to  be  considered  as  the 
goods  last  purchased  (Art.  1582) ;  for  optional  method  see 
Art.  1582,  3d  Par. 

40.  How  figured. — Inventories  may  be  figured  (1)  at  cost, 
or  (2)  at  cost  or  market,  whichever  is  lower.  All  goods  must 
be  treated  consistently  according  to  one  method  or  the  other. 
They  cannot  both  be  used.  To  change  from  one  method  to 
the  other  permission  must  be  secured  from  the  Commissioner 
(Art,  1582).  For  new  special  rule  as  to  unsaleable  or  defec- 
tive goods  see  Art.  1582,  2d  Par. 

Salaries  and  Wages 

41.  Reasonable  allowance  for  services  rendered. — Salaries 
and  wages  are  allowed  as  an  expense  when  they  are  reason- 
able and  for  services  rendered  (Sec.  214a  (1)  ).  See  in  general 
as  to  what  are  reasonable  salaries  Art.  105  and  Bull.  3,  p.  133; 
L.  O.  1045. 

They  are  deductible  for  the  year  they  are  incurred  or  paid. 
Where  services  extend  over  more  than  one  year  see  Par.  33. 

42.  Own  salary,  wife's  or  children's. — If  you  work  your- 
self deduct  your  own  salary  here;  likewise  the  salary  of  your 
wife,  but  not  of  your  minor  dependent  children  (Art.  291) ; 
your  salary  must  be  returned  as  income.  The  salary  of  your 
wife  should  preferably  be  reported  in  a  joint  return  or  in  her 
separate  return  (Art.  401). 

10 


43.  Not  paid  in  money. — Whenever  salaries  or  wages  are 
paid  otherwise  than  by  money  the  market  value  of  what  is 
given  is  deductible  (see  Art.  22  and  Art.  33). 

44.  Increase  in  salaries. — Increases  in  salaries  agreed  upon 
after  the  year  is  over  cannot  be  made  to  apply  to  the  past 
year  and  cannot  be  deducted  as  an  expense  for  the  past  year 
(Bull.  4,  p.  131;  A.R.  R.  493). 

45.  Bonuses. — Bonuses  given  to  employees  may  be  de- 
ducted if  when  added  to  the  regular  salary,  they  do  not 
amount  to  more  than  a  reasonable  compensation  (Art.  107). 

A  bonus  given  at  the  end  of  an  employee's  service  is  de- 
ductible as  well  as  the  annual  bonuses  (37-21-1814;  O.  D. 
1029). 

46.  Allowance  to  widow  of  employee. — See  Par.  16. 

47.  Traveling  expenses. — See  Par.  77 . 

Rent 

48.  Rent  paid  for  business  property  not  owned  by  the 
taxpayer  is  deductible.  If  the  taxpayer  has  to  pay  the  taxes 
he  may  add  this  as  part  of  the  rent  (Art.  109). 

For  treatment  of  capital  improvements  made  by  lessee 
which  belong  to  lessor,  see  Art.  109. 

A  professional  man  may  deduct  the  rent  (or  the  part  there- 
of) paid  for  office  room  (Art.  104). 

Interest 

49.  Interest  deductible. — All  interest  paid  in  connection 
with  the  business  is  here  deductible.  If  the  money  is  used 
in  the  business  it  makes  no  difference  that  the  loan  is  secured 
by  tax-exempt  securities  (Sec.  214a  (2)  ). 

Interest  paid  because  taxes  are  paid  late  is  deductible  (Bull. 
2,  p.  227;  O.  D.  922). 

50.  Interest  not  deductible. — No  deduction  may  be  taken 
for  any  allowance  by  way  of  interest  on  your  own  capital 
invested  in  your  own  business  (Art.  122). 

Taxes 

51.  Deductible  taxes. — All  business  taxes,  except  those 
listed  in  the  next  paragraph,  are  deductible  (Sec.  214a  (3)  ). 

11 


Automobile  licenses  used  in  the  business  are  here  deduct- 
ible (Art.  131).  Revenue  stamps  used  in  the  course  of  busi- 
ness are  here  deductible. 

Penalties  added  to  the  Federal  taxes  are  deductible  except 
when  imposed  for  fraudulent  conduct  (Bull.  1,  p.  241 ;  O.  926). 

Interest  on  taxes  is  deductible  as  interest,  not  taxes,  see 
Par.  49. 

52.  Taxes  not  deductible.— (Sec.  214a  (3)  ). 

(1)  Federal  income  and  excess  profits  taxes. 

(2)  Local  betterment  assessments. 

(3)  Foreign  income  and  excess  profits  taxes  allowed  as  a 
credit  directly  against  the  amount  of  the  tax  (Par.  155).  If 
any  part  is  not  allowed  as  a  credit  (see  Par.  155)  it  is  de- 
ductible under  Par.  51. 

4.  Taxes  on  stockholder's  interest  paid  by  corporation. 

Repairs 

53.  Repairs. — This  refers  to  the  ordinary  incidental  ex- 
penses necessary  to  keep  things  in  good  condition.  It  does 
not  include  depreciation  or  replacements  (Art.  103).  Amounts 
expended  for  books,  furniture  and  instruments  are  not  repairs 
(Art.  104). 

A  deduction  is  allowed  for  a  proper  proportion  only  of  the 
expenses  incurred  (and  depreciation  sufifered)  when  a  car 
bought  for  personal  use  is  at  times  used  for  business  purposes 
(Bull.  3,  p.  131;  A.  R.  R.  266). 

Wear  and  Tear 

54.  Depreciation. — A  reasonable  allowance  for  the  wear 
and  tear  of  property  used  in  the  business  (Art.  162)  may  be 
deducted  (Sec.  214a  (8)  ).  The  mere  fact  that  the  value  of 
goods  has  decreased  due  to  fluctuation  in  the  market  is 
not  depreciation  (Art.  161).  The  reason  for  the  deduction  is 
the  gradual  loss  of  your  capital  investment. 

55.  For  what  property. — 

(1)  All  real  and  personal  property  used  for  business  pur- 
poses, but  not  stock  in  trade,  etc.,  which  are  included  in  in- 
ventories ;  automobiles  used  in  a  profession.     See  Par.  53. 

No  depreciation  is  allowed  for  land :  only  for  buildings. 

(2)  Patents,  copyrights,  licenses,  franchises  having  a  lim- 
ited duration  (Art.  163). 

12 


(3)  Other  intangible  property,  as  good  will,  if  it  can  be 
shown  that  it  will  last  only  a  limited  time.  The  full  facts 
must  be  furnished  to  the  Commissioner  (Art.  163). 

Note. — No  depreciation  is  allowed  on  stocks,  bonds,  etc. 
(Art.  161).  No  depreciation  is  allowed  on  property  for  per- 
sonal use  or  pleasure,  as  personal  automobile,  building  used 
for  residence  only  (Art.  162). 

56.  How  to  figure. — Estimate  how  long  the  property  can 
be  used  and  divide  the  cost  by  the  number  of  years.  The 
sum  thus  given  is  the  amount  to  deduct  each  year.  If  the 
property  was  acquired  before  March  1,  1913,  take  the  market 
value  on  that  date  and  figure  the  number  of  years  from  that 
time.  This  market  value,  unless  otherwise  shown,  will  be 
considered  to  be  cost  minus  depreciation  up  to  March  1,  1913 
(Art.  164).  Where  goods  are  acquired  during  the  year  only 
a  proportionate  share  of  a  year's  depreciation  may  be  taken 
(1-2-18;  I.  T.  1158). 

Other  methods  are  allowed.  The  method  adopted  must  be 
set  out  in  the  return  (Art.  165). 

57.  When  taken. — To  be  allowable  the  deduction  for  de- 
preciation must  be  charged  off  on  the  books  (Art.  169).  This 
may  be  done  even  after  the  year  is  over  (Bull.  4,  p.  64; 
A.  R.  R.  Z77^.  If  the  return  has  already  been  filed,  permission 
may  be  given  to  amend  the  return  to  deduct  depreciation  not 
charged  off  or  not  sufficiently  charged  off.  It  is  wrong  to  de- 
duct more  for  depreciation  any  year  because  you  failed  to  de- 
duct it  before  (Art.  167). 

58.  Obsolescence. — If  property  not  stock  in  trade  becomes 
useless  in  the  business  due  to  changes  in  business  conditions 
or  to  new  inventions,  etc.,  its  value  less  the  cost  of  salvage 
may  be  charged  off  as  a  loss.  Full  explanation  must  be  given 
in  the  return  (Arts.  143,  167  and  170). 

In  certain  exceptional  cases  good  will  may  be  the  subject 
of  obsolescence  (Bull.  2,  p.  141 ;  O.  D.  472). 
58a.     Depletion.— See  Sec.  214a  (10). 

Losses 

59.  General  statement. — All  losses  incurred  in  the  business 
and  not  compensated  by  insurance  are  deductible  (Sec.  214a 
(4)  ). 

Here  are  entered  only  property  losses  due  to  fires,  storms, 

13 


shipwreck,  or  other  casualty  or  from  theft.  For  losses  on 
the  sale  of  capital  assets  see  commencing  at  Par.  81.  See 
also  Par.  135. 

60.  Amount  of  loss. — In  such  cases  the  value  as  of  March 
1,  1913  is  taken  as  a  basis  for  computing  the  loss  (Sec. 
214a  (6)  ). 

Example:  Property  costs  $1,000  bought  1910.  On  March 
1,  1913,  it  was  worth  $1,500.  It  was  thereafter  partially 
damaged  by  fire  so  that  it  was  worth  only  $500.  The  de- 
ductible loss  is  $1,000. 

61.  Year  taken. — All  losses  must  be  taken  for  the  year  act- 
ually sustained.  If  ascertained  after  the  return  is  filed,  an 
amended  return  should  be  filed.  The  loss  should  not  be  taken 
for  the  year  when  discovered  (Sec.  214a  (6)  and  Art.  HI). 
Some  overlapping  is  allowed,  if  consistently  done  (Art.  111). 

Example :  Theft  discovered  the  next  year.  Loss  belongs 
to  year  loss  occurred  (Art.  111). 

(a)  The  rule  applies  even  though  part  of  the  loss  is  paid 
for  by  insurance  the  second  year  (Bull.  1,  p.  123;  T.  B.  R. 
55). 

62.  Special  provision. — Where  substantial  financial  loss 
or  sacrifice  would  result,  the  Commissioner  upon  applica- 
tion may  allow  the  loss  to  be  deducted  for  a  different  year. 
The  return  should  be  made  out  with  the  loss  deducted  for 
the  year  it  was  sustained  and  permission  to  change  should 
be  asked  in  an  application  setting  forth  the  facts,  attached 
to  the  return.  This  applies  to  the  returns  from  1917  on 
(Art.  146).     It  does  not  apply  to  shrinkage  in  inventory. 

62a.     Amortization. — See  Sec.  214a  (9). 

Bad  Debts 

63.  To  what  applies. — This  section  on  bad  debts  concerns 
only  those  reporting  on  the  accrual  basis,  as  no  bad  debt  may 
be  charged  off  unless  it  has  already  been  reported  as  income 
in  the  same  return  or  a  previous  return  when  contracted.  This 
includes  debts  for  salaries,  wages,  etc.  (Art.  152). 

Notes  and  accounts  receivable  which  were  purchased  may 
be  charged  off  only  to  the  extent  of  their  cost  (Arts.  151  and 
152). 

For  worthless  purchase  mortgage  debt  see  Par.  107. 

14 


64.  Two  methods, — Taxpayers  are  given  the  choice  either 
(1)  of  charging  off  debts  in  whole  or  in  part  or  (2)  setting 
up  a  reasonable  addition  to  a  reserve  for  bad  debts  which  will 
be  deductible  (Sec.  214a  (7)  ). 

They  may  choose  whichever  method  they  desire,  no  matter 
what  their  past  practice  has  been.  They  must  state  with  their 
return  which  method  they  select  and  may  not  change  there- 
after without  permission  from  the  Commissioner  (Art.  151). 

65.  Charged  off  wholly. — If  the  circumstances  show  that 
no  part  of  the  debt  is  recoverable,  it  may  be  wholly  charged 
off.  It  is  not  essential  that  suit  be  brought  or  that  the  debtor 
be  bankrupt  (Art.  151). 

66.  Charged  off  in  part. — Whenever  this  is  done,  there 
must  be  a  sufficient  reason  in  the  case  of  each  debt.  No  gen- 
eral average  partial  reduction  is  permissible. 

A  statement  must  accompany  the  return  explaining  the  de- 
duction (Art.  151). 

67.  When  charged  off. — Bad  debts  to  be  deductible  must 
be  actually  charged  off  on  the  books  before  the  year  ends 
(Sec.  214a  (7)  ). 

68.  A  reserve  for  bad  debts. — Those  adopting  this  method 
must  file  a  statement  witTi  their  return.  You  must  first  figure 
what  reserve  should  have  been  set  up  at  the  close  of  the  pre- 
vious year,  which  then  of  course  was  not  and  would  not  now 
be  deductible.  Charge  to  reserve  the  debts  charged  off  during 
the  year:  those  outstanding  Dec.  31,  1920  are  deductible, 
those  accruing  later  are  not  deductible.  A  reasonable  sum 
may  then  be  added  as  a  reserve  which  also  is  deductible  (Art. 
155). 

Example:  Suppose  on  Dec.  30,  1920,  you  would  have  set 
up  a  reserve  of  $5,000.  During  the  year  you  charged  off 
$3,000,  of  which  $1,800  were  outstanding  Dec.  31,  1920.  For 
next  year  you  estimate  you  need  $6,000  as  a  reserve.  To  the 
$2,000  which  would  be  left,  you  may  add  $4,000.  The  $4,000 
is  deductible  as  well  as  the  $1,800. 

69.  Secured  debts. — Mere  fluctuation  in  the  value  of  a 
security  is  no  cause  for  any  deduction.  If,  however,  it  can  be 
shown  to  the  satisfaction  of  the  Commissioner  that  a  part 
of  the  debt  will  not  be  collected  for  reasons  other  than  market 

15 


fluctuation  of  the  security  such  part  may  be  deducted.  If  the 
security  is  entirely  worthless  (and  nothing  can  be  recovered 
from  the  debtor)  the  entire  amount  of  the  debt  may  be  al- 
lowed as  a  deduction.  When  the  security  is  sold  for  less  than 
the  debt  and  nothing  can  be  recovered  from  the  debtor,  the 
balance  still  owed  is  allowed  as  a  deduction  in  whole  or  in 
part  for  the  year  when  it  is  definitely  ascertained  that  it  will 
not  be  paid.  This  rule  applies  whether  the  creditor  is  the 
purchaser  or  some  one  else.  If  the  creditor  buys  in  the  se- 
curity for  the  amount  of  the  debt  there  is  no  gain  or  loss 
until  the  security  is  sold  or  disposed  of  (Art.  153). 

Other  Expenses 

70.  Capital  charges. — Certain  expenditures  in  the  nature  of 
a  permanent  investment,  as  for  buildings,  machines,  etc.,  may 
not  be  deducted  as  an  expense  nor  any  expenditures  in  con- 
nection therewith  (Sec.  215a  (2)  ). 

Such  are  (1)  Commissions  for  purchase  of  business  prop- 
erty (Art.  293),  (2)  cost  of  defending  suits  relating  to  busi- 
ness property  (Art.  293). 

Such  charges  are  added  as  part  of  the  cost.  For  expenses 
of  administration  see  Par.  162. 

71.  Personal  expenses. — Expenses  for  one's  self  or  for  the 
family  are  not  deductible  (215a  (1)  ).     Such  are: 

(1)  Life  insurance  (Art.  291). 

(2)  Allowances  to  children   (Art.  291). 

(3)  Alimony  (Art.  291). 

(4)  Insurance  on  own  dwelling  (Art.  291). 

72.  Year  in  which  deducted. — The  rule  is  the  same  as  in 
Par.  61 :  the  expense  is  deducted  in  the  year  it  is  paid  or  in- 
curred. 

Examples:  1.  Goods  bought  one  year  and  returned  in 
damaged  condition  the  next  year.  Loss  belongs  to  latter 
year  (Bull.  2,  p.  155;  A.  R.  R.  155). 

2.  Contingent  claims.  No  deduction  can  be  taken  until  it 
is  determined  that  a  loss  will  be  suffered  (Bull.  2,  p.  137; 
O.  D.  556). 

3.  Unliquidated  claims.  This  is  charged  to  the  year  when 
liquidated  by  judgment,  agreement,  or  otherwise  (Art.  Ill 
and  Bull.  l,p.  217;  S.  983). 

16 


73.  Insurance. — Premiums  paid  for  accident  insurance 
connected  with  the  business  against  liability  to  employees  or 
to  any  one  else,  premiums  paid  under  Workmen's  Compen- 
sation Acts,  premiums  for  fire  insurance  on  business  property 
are  deductible  (Art.  101).  Premiums  paid  for  life  insurance 
on  life  of  employee  where  taxpayer  is  a  beneficiary  are  not 
deductible  (Sec.  215a  (4)  ).  Life  insurance  put  on  for  the 
benefit  of  the  officers  or  employees  is  deductible  (Art.  294). 

74.  Other  professional  expenses.  Dues  to  professional  so- 
cieties, subscriptions  to  professional  journals,  expense  of  fuel, 
light,  water  and  telephone  used  in  the  office  may  be  deducted 
(Art.  104). 

75.  Pensions. — Pensions  paid  to  employees  or  their  fam- 
ilies are  a  deductible  expense  (Art.  108). 

76.  Allowance  to  widow  of  employee. — The  amount  ordi- 
narily earned  by  a  deceased  employee  ^aid  to  the  widow  for 
a  limited  period  is  allowed  as  an  expense  (Art.  108).  Amounts 
paid  beyond  that  period  are  not  allowed  (36-21-1798;  O.  D. 
1017). 

77.  Traveling  expenses. — All  traveling  expenses  may  be 
here  deducted.  The  entire  amount  spent  for  board  and  lodg- 
ing is  deductible  (Sec.  214a  (1)  and  Art.  101a).  See  also 
Par.  10. 

78.  Damages  for  injuries. — Any  amount  paid  to  employees 
or  any  one  else  for  injuries  sustained  in  connection  with  the 
business  not  covered  by  insurance  may  be  deducted.  It  need 
not  be  as  a  result  of  a  suit;  it  may  be  by  agreement  (Art.  108). 

Loss  in  Business 

79.  Effect  for  same  year. — If  there  is  a  loss  in  the  business 
it  is  to  be  subtracted  from  any  gains  in  the  other  items. 

80.  Deduction  of  net  loss  in  business  against  income  of 
later  years. — If  the  business  schedule  is  minus,  that  is  if  there 
is  a  loss,  this  to  an  amount  figured  below  may  be  set  off 
against  the  net  income  of  the  following  year,  and  if  this  net 
income  is  less  than  the  loss  the  remainder  of  the  loss  may  be 
set  off  against  the  net  income  of  the  year  after.  If  there  is  a 
loss  in  the  sale  of  business  capital  assets  it  is  to  be  added  to 
this  loss;  if  there  is  a  gain  it  is  to  be  subtracted. 

This  cannot  be  used  until  1922  for  loss  in  1921. 

17 


The  amount  of  such  loss  that  may  be  so  set  off  is  figured 
as  follows  (Sec.  204;  Arts.  1601  and  1602) : 

Take  the  entire  net  income  for  the  year.  If  this  is  positive, 
you  need  proceed  no  further  as  no  deduction  will  be  allowed. 
If  this  is  minus  proceed  and  add : 

(1)  Difference  if  any  between  (a)  interest  received  from 
entirely  tax-exempt  securities  (see  Par.  12  and  Par.  121)  and 
(b)  non-deductible  interest  paid  to  purchase  or  carry  tax- 
exempt  securities  (Par.  130).  If  (b)  is  greater,  ignore  this 
item. 

(2)  Difference  if  any  between  (a)  deductible  losses  on 
transactions  outside  the  business  and  (b)  all  the  taxable  gains 
or  profits  outside  the  business.  If  (b)  is  greater,  ignore  this 
item. 

If  their  sum  is  less  than  the  minus,  the  difference  is  the 
amount  that  may  be  deducted.  If  only  one  item  is  positive, 
if  that  is  less  than  the  minus,  the  difference  is  the  amount 
that  may  be  deducted.  If  their  sum  or  either  one  is  greater 
than  the  minus,  there  is  no  deduction.  If  both  items  are  nega- 
tive the  whole  original  minus  is  to  be  deducted. 

Examples:     (1)  Net  loss  in  business  (and 

sale  of  capital  assets  thereof) $5,000 

Net  income  on  entire  return $3,000 

No  deductible  loss. 

(2)  Net  loss  in  business,  etc $5,000 

Net  loss  on  entire  return $2,000 

Interest  from  tax-exempt  securities     $100 

Non-deductible   interest    40 

$60 

Losses  on  transactions  outside  busi- 
ness   $1,500 

Gains  on  transactions  outside  busi- 
ness         600 

$900 

$960 

Deductible  loss  against  future  years $1,040 

(Art.  1605.) 

This  deduction  is  open  to  a  partnership  business  and  busi- 
ness carried  on  by  trustees  (Sec.  204c  and  Art.  1603). 
For  fiscal  year  1920-1  see  Sec.  204d. 

18 


ITEMS:     PROFIT   OR   LOSS   FROM   SALE   OF   REAL 
ESTATE 

PROFIT  OR  LOSS  FROM  SALE  OF  STOCKS, 
BONDS,  ETC. 

81.  General  statement. — These  two  items  will  be  treated 
together,  as  the  rules  applicable  to  them  are  practically  the 
same.  The  one  item,  of  real  estate,  always  involves  the  ques- 
tion of  depreciation  (see  Par.  S3)  ;  stocks  and  bonds  do  not, 
although  patents  and  copyrights  which  come  in  the  same  item, 
do.  Instead  of  the  word  "profit"  the  word  "gain,"  which  is 
found  in  the  statute,  will  be  used. 

These  items  include  the  sale  of  capital  assets  of  any  kind, 
whether  used  in  business  or  not,  but  not  stock  in  trade.  It 
includes  in  certain  cases  the  sale  of  good  will  when  sold  with 
the  business  it  belongs  to  (Art.  41).  There  are  special  rules 
for  sales  on  the  installment  plan  (Arts.  42-45).  However, 
although  all  gains  are  income,  all  losses  are  not  deductible. 
See  Par.  85. 

Gain  from  the  sale  of  tax-exempt  securities  is  taxable 
(Bull.  3,  p.  49;  CD.  737). 

For  year  profits  and  losses  are  returned  see  Pars.  4  and  61-2. 

82.  No  gain  or  loss. — No  gain  or  loss  occurs  until  the 
property  is  sold  or  disposed  of.  Mere  increase  or  decrease  in 
value  does  not  constitute  gain  or  loss  (Arts.  23  and  144). 

A  donor  suffers  no  gain  or  loss  when  making  a  gift  (Art. 
141). 

No  gain  or  loss  is  registered  when  property  passes  to  an 
executor,  administrator,  trustee,  heir  or  legatee.  A  gain  or 
loss  occurs  only  when  the  property  is  sold  by  such  a  person 
(Art.  1563).  Likewise,  there  is  no  loss  if  a  life  tenant  re- 
ceives his  estate  after  it  has  shrunk  in  value  (Sec.  215b  and 
Art.  295). 

Worthless  stock  is  treated  as  a  bad  debt.     See  Par.  141. 

83.  Effect  of  depreciation  on  sale  or  disposition  of  prop- 
erty.— When  property  is  sold  or  disposed  of,  the  amount  of 
any  deductible  depreciation  charged  off  against  the  property 
should  be  added  to  the  sale  price  to  compute  the  gain  or  loss 
(Art.  1561). 

In  the  following  paragraphs  and  examples  it  will  be  as- 

19 


sumed  that  this  is  done  in  each  instance,  in  order  not  to  com- 
plicate matters.    See  in  general  commencing  at  Par.  54. 

In  the  sale  of  a  dwelling  used  solely  as  a  residence  by  the 
owner  as  no  depreciation  was  deductible,  none  need  be  added 
to  the  sale  price. 

84.  When  made  on  sale  of  real  estate. — Gain  or  loss  on 
sale  of  real  estate  as  well  as  any  other  property  is  made  or 
incurred  on  the  day  the  deed  is  passed,  not  on  the  day  the 
contract  is  made  (Bull.  2,  p.  78;  A.  R.  R.  13). 

85.  Non-deductible  losses. — (1)  Shrinkage  in  inventory  is 
not  a  deductible  loss,  except  as  reflected  by  the  inventory. 

(2)  Losses  from  illegal  transactions  as  gambling  are  not  de- 
ductible (Art.  141). 

(3)  Losses  on  transaction  not  entered  into  profit,  as  buying 
a  dwelling  house  for  personal  residence  only  (Art.  141). 

(4)  Shrinkage  in  value  of  life  estate  see  Par.  82. 

(5)  Loss  on  sale  of  capital  assets  of  a  trust  when  the  in- 
come of  the  life  tenant  is  not  diminished.    See  Sec.  215b. 

86.  Thirty-day  clause. — On  sale  of  stock  or  securities  on 
transactions  not  connected  with  the  business.  No  loss  is  al- 
lowed where  within  30  days  before  or  after  the  disposition  of 
the  stock  or  securities  substantially  the  same  stock  or  se- 
curities are  acquired  (except  by  inheritance)  and  held  for  any 
time  after  the  disposition.  If  only  a  part  is  acquired  then  only 
a  part  of  the  loss  is  disallowed  (Sec.  214a  (5)  ).  The  property 
so  acquired  takes  the  place  of  the  old  in  figuring  gain  or  loss 
on  any  subsequent  sale  (Sec.  202d  (3)  ). 

Such  losses  in  the  regular  course  of  business  by  a  dealer  in 
securities  are  deductible  under  Par.  59. 

Example:  Suppose  stock  purchased  for  $1,000  and  sold 
for  800;  repurchased  within  30  days  for  $775.  No  loss  is 
allowed  and  the  last  stock  bought  is  still  figured  as  costing 
$1,000. 

Example:  Ten  shares  bought  @  100  for  $1,000.  Sold 
@80  for  $800.  Three  repurchased  within  30  days  @  90  for 
$270.  Of  the  $200  loss  only  3/10  is  disallowed,  leaving  a 
net  loss  of  $140.  The  three  new  shares  are  figured  as  cost- 
ing $300. 

Example:  Suppose  A  had  ten  shares  of  a  certain  stock 
and  bought  ten  more  and  sold  the  latter  ten  within  thirty 

20 


days  for  a  loss,  the  loss  would  be  deductible  as  the  stock 
purchased  is  not  held  after  the  sale.  Likewise  if  all  twenty 
were  sold  at  a  loss,  the  whole  loss  would  be  deductible 
(Art.  147). 

86a.  Short  sales. — The  thirty-day  rule  does  not  apply  to 
short  sales,  even  though  the  purchase  to  replace  the  bor- 
rowed stock  takes  place  within  thirty  days  of  the  short  sale 
(Art.  147). 

87.  Tax-exempt  dividends. — On  the  sale  of  stock,  any  tax- 
exempt  dividends  received  i.  e.  out  of  earnings  before  March 
1,  1913  (see  Par.  113)  are  to  be  added  to  the  sale  price  and  no 
loss  will  be  allowed  unless  such  increased  sale  price  is  less 
than  the  cost  (Sec.  201b). 

Example:  Stock  cost  $150.  Tax-exempt  dividends  $40. 
Sale  price  $120.    There  will  be  no  loss. 

Note:  There  will  be  no  gain  either,  as  tax-exempt  divi- 
dends are  ignored  in  figuring  gains,  (Art.  1543), 

88.  When  the  property  can't  be  identified. — If  property, 
as  for  example,  stock  is  bought  at  various  times,  and  a  portion 
is  sold  and  you  can't  tell  which  part  you  sold,  you  must  take 
the  property  earliest  bought  to  determine  the  gain  or  loss 
(Art.  39).  . 

Example:  25  shares  bought  at  100  in  1915.  25  shares 
bought  at  125  in  1918.  30  sold  in  1921  at  150  for  4,500 
can't  be  identified. 

Cost  price  then  would  be  25  (g  100  =  2500 

5  (g  125  =    625 

3125— gain  of  1375. 

Property  Bought  or  Acquired  On  or  After  March  1,  1913 

89.  Gain  on  property  bought  on  or  after  March  1,  1913. — 

There  is  a  gain  when  the  sale  price  is  greater  than  the  cost, 
the  amount  of  gain  being  the  difference  (Sec.  202a). 

90.  Loss  on  property  bought!  on  or  after  March  1,  1913. — 

There    is    a    deductible    loss    if    such    property    is    sold    for 

21 


less  than  its  cost.    The  amount  of  the  loss  will  be  the  differ- 
ence between  the  cost  and  the  selling  price  (Sec.  202a). 

If  stock  or  securities  see  thirty-day  clause  (Par.  86),  and  if 
stock,  rule  as  to  tax-exempt  dividend  (Par.  87). 

91.  Gain  on  gifts  acquired  from  living  persons  on  or  after 
March  1,  1913  and  before  Jan.  1,  1921,  and  gifts  acquired  by 
inheritance  at  any  time  on  or  after  March  1,  1913.  There 
is  a  gain  if  the  sale  price  is  greater  than  the  market  value  of 
the  property  when  acquired.  Property  acquired  by  inheri- 
tance dates  from  the  date  of  the  death  of  the  donor.  The 
amount  of  the  gain  is  the  difference  between  the  sale  price 
and  its  market  value.  Of  course  there  is  no  gain  when  a 
legatee  or  heir  receives  a  gift,  only  when  he  disposes  of  it 
(Sees.  202a  2  and  3  and  Art.  1563).    See  also  Par.  164. 

92.  Loss  on  gifts  acquired  from  living  persons  on  or  after 
March  1,  1913  and  before  Jan.  1,  1921,  and  gifts  acquired  by 
inheritance  at  any  time  on  or  after  March  1,  1913. 

There  is  a  deductible  loss  if  the  sale  price  is  less  than  its 
market  value  at  the  time  it  was  acquired.  Property  acquired 
by  inheritance  is  acquired  at  the  date  of  the  death  of  the 
donor  (Sec.  202a  2  and  3  and  Art.  1563).     See  also  Par.  164. 

The  gift  or  inheritance  must  be  accepted  for  purposes  of 
profit  (see  Bull.  1,  p.  122;  T.  B.  R.  35). 

If  stock  or  securities  see  also  Par.  86  and,  if  stock,  rule  as 
to  tax-exempt  dividends  (Par.  87). 

93.  Gain  or  loss  on  gifts  acquired  from  living  persons  on 
or  after  Jan.  1,  1921. — There  is  a  gain  or  loss  according  as  the 
sale  price  is  greater  or  less  than  the  cost  to  the  person  who 
gave  you  the  gift  or  if  he  inherited  it,  according  as  the  sale 
price  is  greater  or  less  than  the  market  value  at  the  date  of 
the  death  of  the  person  through  whom  he  got  it.  If  the  per- 
son who  gave  it  to  you  himself  got  it  by  gift  from  a  person 
who  was  living  at  the  time  of  the  gift,  you  must  go  back 
until  you  find  a  person  who  did  not  get  it  by  gift  from  a  per- 
son living  at  the  time  of  the  gift  and  take  as  a  basis  the  cost 
to  him  or  if  he  inherited  it,  its  market  value  when  he  in- 
herited it  (Sec.  202a  (2)  and  Art.  1562).  If  this  was  before 
March  1,  1913,  see  Par.  94  and  Par.  95. 

22 


To  deduct  a  loss  the  gift  must  also  be  accepted  for  purposes 
of  profit  (see  Bull.  1,  p.  122;  T.  B.  R.  35).  In  case  of  loss  see 
Par.  86  and  Par.  87 

Property  Bought  or  Acquired  Before  March  1,  1913 

94.  Gain  on  property  bought  or  acquired  before  March  1, 
1913. — There  is  a  gain  if  the  sale  price  is  (Sec.  202a)  : 

(1)  More  than  the  cost  and  also 

(2)  More  than  the  market  value  on  March  1,  1913. 

The  amount  of  the  gain,  if  any,  is  determined  as  follows 
(Sec.  202b) : 

(1)  Find  the  diflference  between  the  sale  price  and  cost. 

(2)  Find  the  difference  between  the  sale  price  and  the 
market  value  March  1,  1913. 

Take  the  lesser  of  the  two. 

Note.  If  the  property  is  such  that  depreciation  is  allowed, 
any  depreciation  since  March  1,  1913  should  be  added  to  the 
sale  price  in  figuring  the  gain  (Art.  1561). 

Note.  If  the  property  was  acquired  by  gift  or  inheritance 
instead  of  taking  the  cost  take  the  market  value  when  ac- 
quired. Property  acquired  by  inheritance  dates  from  the  death 
of  the  donor  (Sec.  202a  2  and  3)  and  (Art.  1563).  See  also 
Par.  164. 

Examples : 


11X1^X\>0  . 

Value 

Sale  price  (plus 

Cost 

March  1,  1913 

Depreciation) 

Gain 

100 

125 

150 

25 

100 

75 

150 

50 

100 

110 

105 

None 

100 

70 

80 

None 

95.  Loss  on  property  bought  or  acquired  before  March  1, 
1913. — In  order  to  have  a  loss  the  selling  price  must  be: 

(1)  Less  than  the  cost  and  also 

(2)  Less  than  the  market  value  on  March  1,  1913. 
The  amount  of  the  loss  is  determined  as  follows: 

(1)  Find  the  difference  between  the  cost  and  the  sale  price. 

(2)  Find  the  difference  between  the  market  value  on 
March  1,  1913  and  the  sale  price.  The  amount  of  the  loss  will 
be  the  smaller  sum  of  the  two  (Sec.  202b). 

23 


See  rules  as  to  30-days  clause   (Par.  86)   and  tax-exempt 
dividends  (Par.  87). 


Examples : 

Market  Value 

Selling  price  (plus 

Cost 

March  1,  1913 

Depreciation) 

Loss 

150 

200 

175 

None 

150 

125 

100 

25 

150 

175 

125 

25 

150 

100 

125 

None 

Note.  Depreciation,  if  any,  should  be  added  to  sale  price 
(Art.  1561). 

Note.  If  the  property  was  acquired  by  gift  or  inheritance, 
instead  of  taking  the  cost  take  the  market  value  when 
acquired.  Property  acquired  by  inheritance  is  acquired  on 
the  date  of  the  death  of  the  donor  (Sec.  202a  2  and  3  and 
Art.  1563).     See  also  Par.  164. 

Special  Cases 

96.  Preferred  stock  with  common  as  bonus. — If  the  cost 
can  be  fairly  divided  between  the  two,  this  should  be  done 
and  gain  or  loss  can  be  computed  in  the  usual  way  when  any 
shares  of  either  class  are  sold.  If  the  lump  sum  cannot  be 
fairly  divided  there  will  be  no  gain  until  some  of  the  stock  is 
sold  for  at  least  the  cost  of  all  the  stock,  and  as  the  balance 
of  the  stock,  if  any,  is  sold,  this  will  all  constitute  gain.  No 
loss  may  be  figured  until  all  the  stock  is  sold,  and  the  total 
loss  if  any  will  be  deducted  in  one  lump  sum  (Art.  39). 

97.  Sale  of  stock  after  stock  dividend. — There  is  no  tax- 
able income  from  a  stock  dividend  (Par.  116).  Whether  there 
is  a  gain  or  loss  is  determined  when  the  original  stock  or  the 
stock  dividend  is  sold.  To  determine  whether  there  is  a  gain 
or  loss  divide  the  cost  of  the  original  stock  by  the  total  num- 
ber of  shares,  original  and  additional,  multiply  it  by  the  num- 
ber sold,  and  compare  it  with  the  sale  price.  There  is  a  gain 
or  loss  according  as  the  sale  price  is  greater  or  less  than  such 
cost  (Art.  1548(1)  ). 

If  you  can't  identify  your  stock  in  such  a  case  you  arc 
deemed  to  be  selling  your  earliest  stock  and  the  proportionate 
share  of  the  stock  dividend  with  it  (1548  (3)  ). 

24 


Example:     Bought  20  shares  @  100,  80  at  @  125.     Stock 
dividend  of  10  shares.    Sold  28  @  125  for  $3500. 
Cost  would  be  figured  as  follows : 

20  original  @  100  =  $2000 
20 

2  (that  is  X  10)  dividend  stock  @  100  =      200 

20  +  80 
6  from  the  second  lot  (S  125  =     750 


$2950 
Gain    $550 

98.  Stock  dividend  of  different  class  from  original  stock. — 
Where,  for  example,  a  stock  dividend  of  preferred  is  de- 
clared to  holders  of  common  stock,  the  profit  or  loss  on  the 
subsequent  sale  of  the  stock  is  computed  as  follows : 

Suppose  the  cost  of  the  original  stock  to  be  $1,000.  Suppose 
the  market  value  of  the  original  common  at  the  time  of  the 
dividend  to  be  $750  and  the  market  value  of  the  preferred  to  be 

3    (750) 

$500.     The  cost  of  the  common  will  be  —  ( )  of  $1,000, 

5    (1250) 

2    (500) 

that  is,  $600;  the  cost  of  the  preferred  will  be  —  ( )  of 

5    (1250) 
$1,000,  that  is,  $400.    To  find  the  cost  per  share,  divide  these 
totals  respectively  by  the  number  of  shares  of  each  class.  This 
will  be  the  basis  for  determining  any  gain  or  loss  on  a  sub- 
sequent sale  (Art.  1548  (2)  ). 

99.  Sale  of  unidentified  part  of  stock  dividend. — If  part  of 
a  stock  dividend  is  declared  on  stock  bought  at  various  prices 
and  it  cannot  be  determined  to  what  lots  the  stock  dividend 
sold  belongs,  it  will  be  deemed  to  belong  to  the  earliest  stock 
bought,  secondly  to  the  stock  next  bought,  etc.,  to  the  extent 
that  the  stock  dividend  can  belong  to  each  lot  (1548  (4)  ). 

Example:  15  shares  bought  @  50.  20  shares  @  60.  25 
shares  @  55.  A  stock  dividend  of  10  shares  declared  on 
these  60.  Then  8  of  these  ten  are  sold  at  57.  The  gain  is 
figured  as  follows : 

25 


|§  X  10  =  2i  2|  @  50  =  $125.00  Saleprice  456 

|§  X  10  =  3i  3i  @  60  =    200.00  Cost  444.17 

|fX10  =  4i  2i@55=    119.17  Gain  11.83 

8  444.17 

100.  Sale  of  rights. — The  regulations  provide  that  the  en- 
tire amount  realized  from  the  sale  of  rights  to  subscribe  for 
stock  is  income  (Art.  39).  In  the  example  in  Par.  100a  the 
income  would  be  $375. 

A  different  method  upheld  by  a  District  Court  is  also 
shown.  There  has  been  no  decision  by  the  U.  S.  Supreme 
Court. 

No  income  is  derived  from  the  exercise  of  the  right  to  sub- 
scribe (Art.  39). 

100a.  Court  decision. — Suppose  I  own  ten  shares  bought 
@  $100  and  I  am  allowed  to  subscribe  for  five  more  @  $125 
each  and  I  sell  my  right  to  do  so  for  $75  each.  What  is  my 
taxable  gain? 

First  figure  it  per  share  and  then  multiply  by  five,  the 
number  sold.  Take  the  sum  of  the  original  cost  $1,000  and 
$625  the  new  price,  divide  it  by  the  total  number  of  shares 
15  (10+5).  Subtract  this  from  the  sum  of  the  subscription 
price  $125  plus  the  sale  price  per  share  of  your  right,  $75, 
and  you  get  a  gain  of  $200  —  107§  =  $92f  On  five  shares 
a  total  gain  of  $461§. 

xu^  —  tiQT'              125                               200          92^ 
-"fr  — P07^  75  (i.  e.a^)  107f     5_ 

Old  price  200  new  price  92^       461 1  Total  gain 

Gain  per  share 

Gain  or  Loss  on  Exchange 

101.  No  gain  or  loss. — In  the  following  cases  of  exchange 
no  gain  or  loss  is  figured  (Sec.  202c). 

1.  Exchange  of  property  held  for  investment  for  like  prop- 
erty. This  includes  the  exchange  of  stocks  for  stocks,  bonds, 
notes,  or  any  evidence  of  indebtedness  for  any  evidence  of 
indebtedness,  real  estate  for  real  estate.  The  exchange  of 
bonds  for  stock  comes  under  Par.  102  (Art.  1566). 

2.  Exchange  of  property  used  productively  in  trade  or 
business  for  like  property. 

Example :  Machine,  building.  It  does  not  include  stock- 
in-trade  or  other  property  held  primarily  for  sale. 

26 


3.  Exchange  of  stock  on  a  merger  or  reorganization  of 
one  or  more  corporations. 

4.  When  one  or  more  persons  transfer  property  to  a  cor- 
poration and  immediately  receive  at  least  80%  of  the  voting 
stock  and  at  least  80%  of  all  other  stock.  In  the  case  of  two 
or  more  persons,  their  stock  interests  must  be  about  in  the 
same  proportion  as  their  property  interests  before  the  trans- 
fer. 

The  gain  or  loss  would  come  when  the  new  property  was 
sold, 

102.  Rule  for  other  exchanges. — In  other  cases  than  those 
just  mentioned  in  Par.  101,  there  is  a  profit  or  loss  in  the  case 
of  exchanges  of  all  kinds  whenever  the  property  received  can 
be  readily  sold  on  the  market,  otherwise  there  is  no  gain  or 
loss  until  the  new  property  is  sold  (Sec.  202c).  See  Pars. 
94-5. 

103.  New  property  substituted  for  old. — Whenever  there 
is  no  gain  or  loss  on  an  exchange  as  set  forth  in  Par.  101  and 
Par.  102,  the  new  property  takes  the  place  of  the  old  and  the 
cost  of  the  old  is  the  cost  of  the  new  and  if  the  old  was  ac- 
quired before  March  1,  1913  the  new  is  looked  upon  as  being 
acquired  at  the  same  time  and  the  March  1,  1913  market 
value  of  the  old  would  be  that  of  the  new  (Sec.  202d). 

104.  Where  property  received  on  non-taxable  exchange  is 
of  different  kinds. — Suppose,  100  shares  common  bought  at 
250  for  $25,000  is  exchanged  for  50  common  worth  $440  each, 
in  all  $22,000  and  50  preferred  worth  $110  each,  in  all  $5,500. 
Their  market  value  is  in  the  ratio  of  4  to  1.  Their  respective 
costs  will  be  deemed  to  be  in  the  same  ratio,  namely  $20,000, 
and  $5,000  respectively  (Art.  1567). 

These  will  be  the  bases  for  determining  future  gains  or 
losses. 

105.  When  part  of  the  property  received  has  a  market 
value  and  the  rest  has  not. — Suppose  a  house  is  exchanged  for 
stock  in  a  close  corporation  (which  can't  be  readily  sold)  and 
for  $5,000  in  cash  (Art.  1568). 

First  suppose  the  house  cost  $15,000.  Then  the  cost  of  the 
new  stock  is  deemed  to  be  the  cost  of  the  old  minus  the  other 
property  which  has  a  market  value.     If  the  stock  sells  there- 

27 


after  for  more  than  $10,000  there  will  be  a  gain,  if  for  less, 
there  will  be  a  loss. 

Suppose  the  house  cost  $4,000.  There  is  immediately  a 
gain  of  $1,000  and  when  the  stock  or  any  part  is  sold,  the 
whole  sale  price  will  also  be  a  gain  (Sec.  202e). 

106.     Sale   of  real   estate,   taking   mortgage   back. — If   the 

mortgage  note  can  be  readily  discounted  (Art.  1564),  it  has 
to  be  considered  equivalent  to  cash  and  the  gain  or  loss  fig- 
ured in  the  usual  way  (Art.  46). 

If  the  mortgage  note  cannot  be  discounted,  the  transaction 
is  to  be  treated  as  an  exchange.  If  no  cash  was  paid  in,  the 
gain  or  loss  will  be  all  figured  when  the  note  is  paid.  If  some 
cash  is  paid  in  the  transaction  is  to  be  treated  as  in  Par.  105 
(Art.  46). 

107.  Purchase-Mortgage:  foreclosure  sale. — Where  a 
mortgagee,  who  was  previously  the  owner  and  sold  the 
property,  taking  back  a  purchase  mortgage,  buys  it  in  on 
foreclosure  sale  there  is  no  gain  or  loss  until  the  security  is 
disposed  of,  no  matter  at  what  price  it  is  bought  in.  In 
cases  where  the  mortgagee  had  previously  reported  a  gain 
at  the  time  of  his  sale  to  the  purchaser,  and  he  buys  in  the 
property  for  less  than  the  mortgage  debt  (and  nothing 
further  can  be  secured  from  the  debtor)  he  is  allowed  to 
deduct  this  difference  as  a  loss  up  to  the  amount  of  the 
income  previously  reported  (Art.  46  and  Bull.  4,  p.  39; 
O.  D.  842).  On  future  sales  it  is  figured  at  the  original  cost 
(less  depreciation). 

Example:  A  buys  a  house  for  $2,000,  subject  to  first 
mortgage  of  $4,000.  He  sells  it  to  B,  subject  to  the  same 
mortgage,  for  $2,800,  taking  back  a  second  mortgage  for 
this  amount.  He  reports  a  gain  of  $800.  Later  B  defaults 
and  goes  bankrupt  and  A  buys  it  in  for  $1,500.  He  may 
deduct  only  $800  as  a  loss.  If  he  sells  later  for  $1,500,  he 
may  then  deduct  $500  more.  If  he  sells  it  for  $2,000  or 
over  there  will  be  no  loss  (Art.  46). 

108.  Property  destroyed,  stolen  or  taken  by  eminent  do- 
main or  condemned. — In  such  a  case  if  there  are  proceeds 
which  exceed  the  cost  and  no  replacement  is  made  the  differ- 
ence is  gain  (Art.  262).  If,  however,  the  entire  proceeds  are 
used  to  gef  similar  property  or  to  buy  80%  of  the  stock  of  a 

28 


corporation  issued  for  such  property,  or  if  a  replacement  fund 
with  the  permission  of  the  Commissioner  is  set  aside,  then 
there  will  be  no  gain.  If  only  a  part  is  used,  the  gain  will  be 
cut  down  by  the  same  percentage  (Sec.  214a  (12)  and  Arts. 
261  and  263).     For  losses  see  Pars.  59  and  137. 

Example :  A  building  cost  $60,000.  It  is  destroyed  by  fire 
and  $100,000  insurance  received.  If  the  money  is  not  put  to 
the  same  use  as  before,  there  is  a  gain  of  $40,000.  Suppose 
$70,000  is  reinvested,  that  is  7/10  of  $100,000.  The  gain  is 
cut  down  7/10  to  $12,000.  The  cost  of  the  new  building  is 
reckoned  at  $42,000  (i.  e.  7/10  of  $60,000)   (Sec.  202d  (2)  ). 

109.  When  acquired  before  March  1,  1913. — When  prop- 
erty destroyed,  stolen,  or  condemned,  was  acquired  before 
March  1,  1913,  its  market  value  on  that  date  is  to  be  ascer- 
tained and  the  usual  rule  in  Par.  94  is  to  be  followed  in  de- 
termining whether  there  is  gain  and  the  amount  of  gain 
(Arts.  49  and  262).  The  present  cost  of  replacement  is  not 
material  (see  Bull.  4,  p.  92;  A.  R.  M.  122).  The  new  prop- 
erty is  figured  at  cost  or  March  1,  1913  value,  whichever  is 
higher  (Art.  261). 

110.  Liquidating  dividends. — Where  stockholders  are  paid 
out  of  capital  instead  of  out  of  earnings,  the  amount  so  re- 
ceived goes  to  reduce  the  cost  of  the  stock.  If  it  was  bought 
before  March  1,  1913  it  goes  to  reduce  by  the  same  amount 
its  market  value  on  that  day.  When  sold  later  the  gain  or 
loss  is  to  be  reckoned  in  the  usual  way  on  the  basis  of  the 
reduced  cost  and  value  (Sec.  201c  and  Art.  1544). 

Where  a  corporation  is  liquidated  entirely,  the  total  amount 
received  from  capital  is  taken  as  a  sale  price  and  the  gain  or 
loss  is  figured  in  the  usual  way  (see  Art.  1544). 

Of  course,  if  any  of  the  liquidating  dividends  are  out  of 
earnings  after  Feb.  28,  1913,  they  are  taxable  income  (Art. 
1545). 

111.  Sale  of  partnership  interest. — If  a  partner  sells  his 
interest  and  receives  in  cash  or  other  property  which  has  a 
ready  market  more  or  less  than  he  paid  in  (if  before  March  1, 
1913  it  must  be  also  more  or  less  than  his  interest  was  worth 
on  that  day)  there  is  a  gain  or  loss,  as  the  case  may  be. 

If    a    partner   withdraws    or    a    partnership    dissolves    and 

29 


the  partner  gets  his  share  in  kind,  that  is  so  much  stock  in 
trade,  so  much  supplies,  in  other  words  there  is  merely  a 
division  of  the  partnership  property,  there  is  no  gain  or  loss. 
Only  when  it  is  sold,  is  the  gain  or  loss  to  be  computed  as  in 
the  case  of  liquidating  dividends  received  by  stockholders 
(see  Par.  110).  If  there  is  any  part  of  undistributed  earnings 
in  the  business  on  which  he  had  to  pay  the  tax  (see  Par.  158), 
the  amount  of  such  earnings  must  be  added  to  the  cost  of  his 
interest  in  figuring  gain  or  loss  (Art.  1570).  When  there  is 
a  change  in  the  partnership,  the  return  should  set  out  all  the 
facts  (Art.  1570). 

ITEM:     DIVIDENDS 

112.  How  taxed. — Dividends  from  domestic  corporations 
and  certain  foreign  corporations  (Par.  129)  are  not  subject  to 
the  normal  tax,  but  only  to  the  surtax.  Here  are  to  be  in- 
serted only  dividends  from  domestic  corporations.  No  such 
item  appears,  therefore,  on  Form  1040A,  which  is  for  income 
of  less  than  $5,000,  as  the  surtax  commences  only  with  in- 
comes of  $5,000.  Item  8  on  page  2  of  Form  1040A  is  inserted 
for  answer  only  to  determine  whether  Form  1040  should  be 
used,  or  in  the  event  that  it  may  become  necessary  to  use  it. 

Not  only  dividends  received  directly,  but  the  taxpayer's 
proportionate  share  of  dividends  received  by  partnerships, 
personal  service  corporations,  and  fiduciaries,  in  which  he  has 
an  interest,  are  all  to  be  reported  here  for  the  surtax.  These 
were  not  reported  above.    See  Pars.  16,  18,  23. 

113.  Definitions. — Taxable  dividends  are  distributions 
made  by  corporations  out  of  earnings  earned  on  or  after  March 
1,  1913.  Distribution  from  earnings  of  personal  service  cor- 
porations earned  from  1918-1921  are  not  included  (Sec.  201a). 
All  distributions  from  earnings  or  appreciation  in  property 
(Art.  1543)  before  March  1,  1913  are  tax-exempt  (Sec.  201b). 
For  their  effect  in  figuring  losses  on  sale  of  stock  see  Par.  87. 

114.  Federal  Reserve  Bank  Dividends. — Dividends  from 
the  Federal  Reserve  Banks  themselves  are  totally  exempt. 
However,  dividends  from  national  and  state  banks  which  are 
members  of  the  Federal  Reserve  System  are  taxable  (Art. 
76). 


30 


115.  Out  of  what  earnings. — As  long  as  there  are  earn- 
ings since  Feb.  28,  1913  all  distributions  for  income  tax  pur- 
poses are  deemed  to  be  out  of  such  earnings  and  are  there- 
fore taxable.  When  these  are  all  used  up,  the  other  distribu- 
tions being  from  earnings  before  March  1,  1913  would  be  tax- 
exempt  (201b).  The  year  they  are  earned  makes  no  differ- 
ence as  to  the  tax-rate.  They  are  all  taxed  at  the  rate  for 
the  year  when  received  (Arts.  1541  and  1542).  They  are 
deemed  received  when  the  stockholder  has  an  unconditional 
right  to  demand  the  cash  or  property  declared  as  a  dividend 
(Sec.  201e). 

116.  Stock  dividends. — Dividends  in  good  faith  in  the 
form  of  stock  of  the  corporation  are  not  taxable  (201d).  Cash 
with  option  to  buy  stock  is  a  cash  dividend,  not  a  stock  divi- 
dend, and  is  taxable  (Bull.  3,  p.  22;  O.  D.  565). 

Scrip  dividends  are  taxable  and  are  returnable  for  the  year 
when  the  warrants  are  issued  (Art.  547). 

For  taxable  gains  on  sale  of  the  stock  declared  as  a  stock 
dividend  see  Pars.  98  and  99. 

117.  Other  dividends  not  in  cash. — Dividends  need  not  be 
in  cash,  they  may  be  in  any  property  (Sec.  201a).  Such  prop- 
erty is  to  be  returned  at  its  market  value.  This  includes 
Liberty  bonds  whether  wholly  tax-exempt  or  not  (T.  D. 
2512),  stock  of  another  corporation  even  if  the  stock  is  of  a 
corporation  to  which  has  been  transferred  all  or  a  part  of  the 
assets  of  the  corporation  declaring  the  dividend  (Art.  1547), 
notes  or  bonds  of  the  corporation  itself  (T.  D.  3170). 

118.  Dividends  by  insurance  companies  to  policyholders.— 
The  usual  annual  dividends  to  holders  of  unmatured  policies 
need  not  be  reported,  being  returns  of  premiums :  See  Par.  3. 
Dividends  on  paid-up  policies  are  to  be  treated  as  any  other 
dividends  (Art.  47). 

ITEM:     TAXABLE  INTEREST  ON  LIBERTY  BONDS, 

ETC. 

General  Summary  (Art.  83) 

119.  Exempt  from  normal  tax. — Interest  from  all  U.  S. 
obligations  and  War  Finance  Corporation  bonds  are  exempt 
from  normal  tax  without  limit.    Therefore  as  Form  1040A  is 

31 


concerned  only  with  income  subject  to  normal  tax  it  contains 
no  item  of  interest  from  U.  S.  obligations.  Items  9  and  10  on 
page  2  of  Form  1040A  are  inserted  for  purposes  of  informa- 
tion in  the  event  that  it  turns  out  that  any  one  reporting  on 
Form  1040A  has  taxable  income  of  $5,000  or  over  (Art.  78). 

120,  Credits  for  Liberty  bonds  held  by  fiduciaries,  part- 
nerships and  personal  service  corporations. — If  any  interest 
on  Liberty  bonds,  etc.,  is  included  in  the  income  or  a  part 
thereof  of  a  trust,  taxable  to  the  beneficiary,  he  is  to  include 
his  share  of  such  interest,  which  will  be  included  in  the  credit 
for  the  normal  tax.     See  Par.  147  (Sec.  219d  and  Art.  84a). 

Likewise  each  partner  and  each  member  of  a  personal  serv- 
ice corporation  return  their  proportionate  share  of  Liberty 
bonds,  etc.,  held  by  the  partnership  or  personal  service  cor- 
poration, which  will  be  included  in  the  credit  for  the  normal 
tax.     See  Par.  147  (Sec.  218b  and  Art.  84b). 

121,  What  is  wholly  tax-exempt, — (1)  Interest  on  all  obli- 
gations of  the  United  States  issued  before  Sept,  1,  1917  (Sec. 
213b  (4)  )  including  First  Liberty  Loan  Bonds  3|%,  uncon- 
verted only  (Art.  77). 

(2)  Victory  Loan  3f  notes  {hxX..  81),  including  those  con- 
verted from  Victory  4f  notes  (Art.  82). 

(3)  Postal  Savings  Certificates  (Sec.  213b  (4)  ). 

No  return  whatsoever  need  be  made  of  such  interest. 

122,  Second,  Third,  Fourth  Liberty  Bonds, — This  includes 
First  Liberty  bonds  converted  into  Second,  Third,  or  Fourth 
Liberty  bonds,  as  well  as  seconds  converted  into  thirds.  All 
these  bear  either  4%  or  4|%  interest. 

Exemption  1.  For  all  time.  Interest  on  $5,000  of  such 
bonds  are  exempt  for  all  time.  This  particular  exemption  in- 
cludes Treasury  Certificates  of  indebtedness  and  War  Savings 
Certificates.  In  other  words  $5,000  worth  may  be  divided 
up  as  you  please  among  these  three  (Sec,  1328b  and  Art,  79). 

Exemption  2,  Jan.  1,  1921-July  2,  1923.  Additional  inter- 
est on  $125,000  of  these  three  issues  of  bonds  (Sec,  1328a  and 
Art.  78),  Interest  before  Jan.  1,  1921  (i.  e.  for  fiscal  year  end- 
ing in  1921)  must  be  computed  according  to  the  1918  act 
(Art.  85), 

32 


Exemption  2a.  July  2,  1923-July  2,  1926.  Additional 
$50,000.  When  exemption  2  expires,  exemption  2a  takes  its 
place  (Sec.  1328a  and  Art.  78). 

Both  Exemption  2  and  Exemption  2a  are  in  addition  to 
Exemption  1. 

Exemption  3.  Jan.  1,  1921-July  2,  1923.  Additional 
$30,000.  Interest  from  $30,000  First  Liberty  bonds  converted 
into  Fourth  Liberty  bonds  4^  (Sec.  1328b  and  Art.  80). 

122a.  No  need  of  original  subscription. — There  is  no  re- 
quirement that  any  of  the  bonds  need  be  those  originally 
subscribed  (Sec.  1328b). 

123.  Victory  notes. — All  Victory  4f  notes  including  Vic- 
tory 3f  notes  converted  into  Victory  4f  notes  are  subject  to 
surtax  (Arts.  81  and  82).  For  an  adjustment  of  interest  in  the 
latter  case  see  Art.  82. 

124.  Treasury  certificates  of  indebtedness. — These  are  ex- 
empt from  surtax  up  to  $5,000,  to  the  extent  that  the  exemp- 
tion is  not  used  up  by  Liberty  bonds  or  War  Savings  Certi- 
ficates (see  Par.  122).  (Act  of  Sept.  24,  1917,  c56.  Sec.  7  and 
Act  of  Sept.  24,  1918,  c276.  Sec.  1  (3)  2d  Par.,  and  see  Art.  79). 

125.  War  Savings  Certificates. — These  are  exempt  from 
surtax  up  to  $3,000,  to  the  extent  that  the  exemption  is  not 
used  for  Liberty  bonds  or  Treasury  Certificates  (Par.  122). 
See  authorities  in  Par.  124. 

126.  War  Finance  Corporation  bonds. — These  are  exempt 
from  surtax  up  to  $5,000.     (Act  April  5,  1918,  Sec.  16.) 

127.  How  to  compute  the  exemption. — If  the  amount  held 
at  no  time  exceeds  the  exemptions,  no  interest  will  be  taxable. 
Otherwise  each  period  must  be  figured  separately.  No  aver- 
aging is  permitted :  interest  on  bonds  above  the  exemptions 
are  taxable,  even  though  at  other  times  the  bonds  held  fall 
below  the  exemptions. 

For  bonds  sold  or  bought  between  interest  dates  see  Par.  13. 

ITEM:     OTHER  INCOME 

128.  What  included. — All  income  not  elsewhere  reported 
is  to  be  reported  here,  including: 

33 


(1)  Bad  debts  previously  charged  off  or  taken  as  a  deduc- 
tion, but  later  received  in  whole  or  in  part.  This  is  accounted 
for  the  year  received  (Art,  51). 

(2)  Amount  by  which  receipts  to  a  living  person  from  a 
life  insurance  policy  exceed  the  premiums  paid  by  him  or  for 
him  (see  47-21,  p.  6;  O.  D.  1108).  (Sec.  213b  2  and  Art.  47). 
Where  a  policy  issued  before  March  1,  1913  return  the  excess 
only  from  March  1,  1913  (Art.  90  and  Bull.  3,  p.  54;  Sol.  Op. 
55). 

129.  Dividends  from  foreign  corporations. — The  nature  of 
the  income  is  asked  for,  as  dividends  from  foreign  corpora- 
tions which  for  three  years  before  the  end  of  its  taxable 
year  or  for  such  part  of  three  years  as  it  has  been  in  existence, 
derived  more  than  50%  of  its  income  from  sources  with  the 
U.  S.  (see  Sec.  217),  are  credited  against  net  income  for  the 
normal  tax  just  like  dividends  from  domestic  corporations. 
This  must  be  proved  to  the  satisfaction  of  the  Commissioner 
(Sec.  216a). 

DEDUCTIONS 
ITEM:     INTEREST 

130.  When  deductible. — All  interest  on  indebtedness  not 
deducted  elsewhere  (Par.  49)  may  be  deducted  except  (Sec. 
214a  (2)  ) : 

1.  Interest  paid  to  purchase  or  carry  securities  the  inter- 
est of  which  is  wholly  tax-exempt,  except 

(a)  All  U.  S.  obligations  issued  after  Sept.  24,  1917  and 
originally  subscribed  for.  This  means  any  such  interest  paid 
during  the  year  may  be  deducted  even  though  from  bonds  sold 
during  the  year.     See  next  Par. 

2.  No  deduction  is  allowed  on  a  cash  basis  for  interest  only 
accrued  on  obligations  of  a  deceased  person  (Bull.  2,  p.  114; 
A.  R.  R.  113). 

(a)  The  whole  amount  when  paid  by  the  executor  or  ad- 
ministrator would  be  allowed  as  a  deduction  (Bull.  2,  p.  114; 
A.  R.  R.  113). 

131.  Originally  subscribed. — This  applies  where  you  sub- 
scribed through  a  bank  (Bull.  1,  p.  88;  T.  B.  R.  28),  and  where 
you  converted  your  bonds  into  the  same  issue  (Bull.  3,  p.  124; 

34 


O.  D.  718)    but  it  does  not  apply  where  you  inherited  the 
stock  (Bull.  3,  p.  124;  O.  D.  742). 

132.  Interest  on  taxes. — Interest  paid  when  taxes  are  paid 
late  may  be  deducted  (see  Par.  49). 

ITEM :     TAXES 

133.  General  rule. — The  rule  is  the  same  as  for  the  deduc- 
tion of  business  taxes  (see  Par.  51).  Here  are  entered  all 
other  taxes  including-  those  paid  on  property  used  for  per- 
sonal use  only  i.  e.  license  fee  for  personal  automobile  (Art. 
131).  For  inheritance  and  estate  taxes,  see  next  paragraph 
(134). 

Other  deductible  taxes  are: 

(1)  On  telephone  and  telegraph  messages. 

(2)  On  admissions  and  dues. 

134.  Estate  and  inheritance  taxes. — Estate  and  inheritance 
taxes  are  all  deductible  (Art.  134). 

Where  books  are  kept  on  an  accrual  basis,  they  are  de- 
ductible at  the  date  when  due  and  will  be  deductible  in  the 
taxable  year  in  which  that  date  falls,  unless  the  law  of  the 
jurisdiction  imposing  such  taxes  provide  otherwise  (Sec. 
214a  (3)  ). 

Where  the  tax  is  on  the  right  to  transmit,  the  estate  may 
deduct  the  tax  (Art.  134,  2d  Par.),  as  the  Federal  Estate  Tax. 

Where  the  tax  is  on  the  right  to  receive  the  beneficiary 
may  deduct  the  tax  (Art.  134,  2d  Par.). 

These  two  rules  apply  even  though  the  taxes  by  the  terms 
of  the  instrument  may  be  payable  by  some  one  else  (Art. 
134,  3d  Par.). 

Remainder  men  who  have  to  pay  without  reimbursement 
the  tax  on  the  life  estate  as  well  as  on  their  own  estate  may 
deduct  both  taxes  (Art.  134,  4th  Par.). 

ITEM:     LOSSES 

135.  Which  deductible  here. — Deductible  losses  are  (1) 
those  incurred  in  business  (Par.  59)  ;  (2)  those  incurred  in 
transactions  entered  into  for  profit  (Par.  81)  ;  and  (3)  certain 
other  losses  due  to  casualties.    Only  the  last  are  here  entered. 

136.  In  what  year  deducted. — These  losses  are  to  be  de- 

35 


ducted  for  the  year  sustained.     The  rule  is  the  same  as  for 
business  losses  (see  Par.  61). 

137.  Deductible  losses. — The  only  losses  other  than  losses 
in  business  and  in  transactions  entered  into  for  profit  are 
where  losses  not  connected  with  the  business  occur  from  fire, 
storm,  shipwreck,  or  other  casualty  or  from  theft,  if  not  cov- 
ered by  insurance  (214a  (6)  ).  Thus  damages  to  a  pleasure 
auto  as  a  result  of  a  collision  due  to  a  slippery  street  are  not 
deductible  (Bull.  3,  p.  158;  O.  D.  629).  Any  expense  paid  de- 
fending a  suit  not  connected  with  the  business  is  not  de- 
ductible (Bull.  4,  p.  159;  A.  R.  R.  444). 

When  a  cause  of  a  loss  is  not  known,  i.  e.,  when  you  find 
your  ring  or  watch  missing,  and  cannot  prove  it  was  stolen, 
such  loss  is  not  deductible  (Bull.  2,  p.  130;  O.  D.  526). 

138.  Amount  of  deduction. — The  market  value  of  the  prop- 
erty on  March  1,  1913  in  case  of  such  destruction  or  damage 
is  taken  as  a  basis; 

Example:  Property  in  1910  cost  $80,000.  On  March  1, 
1913  worth  $100,000.  Damaged  by  fire,  not  covered  by  in- 
surance, so  that  its  salvage  value  is  $10,000.  $90,000  may 
be  deducted  as  a  loss. 

ITEM:     CONTRIBUTIONS 

139.  Contributions. — A  deduction  of  15%  of  net  income  is 
allowed  for  contributions  to : 

(1)  The  United  States,  any  state,  territory,  or  any  political 
unit  therein  (city,  town,  county,  etc.),  or  the  District  of  Co- 
lumbia for  public  purposes. 

(2)  Any  corporation,  community  fund,  or  foundation  or- 
ganized and  operated  only  for  religious,  charitable,  scientific, 
literary  or  educational  purposes,  including  posts  of  the  Amer- 
ican Legion  or  the  Women's  Auxiliaries  thereof,  or  for  pre- 
vention of  cruelty  to  children  or  animals. 

Example:  A  man  has  a  net  income  of  $5,000.  He  may 
be  allowed  to  deduct  up  to  $750  for  contributions  actually 
made. 

140.  By  partnerships. — These  are  not  allowed  as  a  deduc- 
tion against  the  partnership  income  which  must  be  reported 

36 


in  full  without  any  deduction.  But  if  an  individual  part- 
ner has  not  used  the  15%  allowance,  he  may  deduct  up  to  the 
15%  his  proportionate  share  of  the  contributions  of  the  part- 
nership (Art.  251). 

Example:  A  partner's  net  income  subject  to  tax  from 
all  sources  is  $10,000.  He  has  contributions  of  $1,000.  A 
partnership  in  which  he  has  a  -J  interest  contributed  $2,100. 
He  stands  $700.  15%  of  $10,000  is  $1,500.  He  used  up 
$1,000  of  this,  he  may  deduct  further  $500  out  of  the  $700. 

ITEM:     BAD  DEBTS 

141.  What  included. — Here  are  included  losses  from  bad 
debts  not  incurred  in  business  previously  reported  as  income. 
The  rules  are  the  same  as  in  the  case  of  bad  debts  incurred 
in  business,  see  commencing  at  Par.  63.  Stocks  or  bonds 
or  claims  which  have  become  worthless  are  treated  as  bad 
debts  and  are  here  deducted  to  the  extent  of  their  market 
value  on  March  1,  1913,  or  if  acquired  thereafter  to  the  extent 
of  the  purchase  price  (Arts.  90,  144,  151,  152  and  154).  They 
may  be  deducted  in  part  if  the  Commissioner  is  satisfied  it 
is  not  a  case  of  temporary  fluctuation  (Art.  154). 

142.  Indorsers  and  sureties. — No  deduction  may  be  made 
by  indorsers  and  sureties  until  their  liability  has  become 
fixed ;  otherwise  they  have  only  contingent  claims  which  are 
not  deductible  (Bull.  2,  p.  137;  O.  D.  556). 

ITEM:     OTHER  DEDUCTIONS  AUTHORIZED  BY 

LAW 

143.  Payments  to  beneficiaries  under  a  will, — This  deduc- 
tion must  be  used  by  an  executor  or  administrator  who  has 
paid  or  credited  the  legatees  or  heirs  with  any  income  due 
them.  In  this  case,  they,  and  not  he,  pay  the  tax  on  such 
income. 

144.  Family  or  personal  expenses. — Attention  is  again 
called  to  the  fact  that  such  expenses  are  not  deductible  (see 
Par.  71). 

No  deduction  is  allowed  for  any  gifts  (Art.  107). 
See  also  Par.  70  as  to  capital  expenditures. 

37 


COMPUTATION  OF  TAX 

145.  Net  income. — This  is  found  by  adding  all  the  items 
which  show  a  gain  and  subtracting  from  their  sum  all  the 
items  showing  a  loss  as  well  as  the  deductions  (Sec.  212a). 

146.  Returns  for  less  than  a  year. — If  a  return  is  made  for 
less  than  a  year,  the  income  is  put  on  an  annual  basis  by 
dividing  it  by  the  number  of  months  and  multiplying  by 
twelve  (Sec.  226c). 

Example:  A  person  with  a  fiscal  year  ending  Sept.  30 
changes  his  taxable  year  to  the  calendar  year  and  makes  a 
separate  return  for  the  three  months  Oct.  1 — Dec.  31.  He 
had  income  of  $3,000.  Dividing  by  three  and  multiplying  by 
twelve  we  have  $12,000  as  the  net  income. 

When  the  tax  is  computed  on  this  annual  basis  only  a 
proportionate  part  is  assessed,  i.  e.,  in  the  above  example 
only  one-fourth. 

147.  Credits. — For  purposes  of  the  normal  tax  only  certain 
credits  are  allowed  as  a  further  deduction  from  net  income. 
These  are  (Sec.  216)  : 

(1)  Taxable  interest  on  Liberty  bonds,  etc.,  taken  from  item 
above. 

(2)  Dividends  received  from  corporations,  taken  from  item 
above. 

(3)  A  personal  exemption,  see  next  Par.  148. 

148.  Personal  exemption. — (1)  $1,000  to  every  single  per- 
son or  married  person  not  living  with  husband  or  wife  (Sec. 
216c). 

(2)  $2,500  or  $2,000  to  every  married  person  living  with 
husband  or  wife  or  to  every  head  of  a  family.  Such  persons 
are  allowed  $2,500  if  the  net  income  is  not  more  than  $5,000, 
otherwise  only  $2,000.  However  on  incomes  up  to  $5,020  the 
tax  is  not  to  be  increased  by  this  reduction  to  $2,000,  in  an 
amount  more  than  the  amount  of  income  in  excess  of  $5,000 
(Sec.  216c). 

Example:  Married  man  has  an  income  of  $5,015.  He  is 
allowed  only  a  $2,000  exemption.  His  tax  is  figured  as 
follows : 

38 


$5,015  $5,015  $100.60 

2,000  2,500  15.00 


$3,015  $2,515  $115.60 

.04  .04 


$120.60  $100.60 

He  pays  a  tax  of  $115.60  not  $120.60. 

(a)  The  husband  and  wife  may  divide  up  the  $2000  or  $2500 
as  they  see  fit  if  they  make  separate  returns  (Sec.  216c). 

(b)  A  head  of  a  family  is  one  who  supports  one  or  more 
person  connected  with  him  or  her  by  blood  relationship,  mar- 
riage or  adoption  (Art.  302)  (see  next  Par.  149). 

(3)  $400  additional.  To  every  taxpayer  who  is  the  chief 
support  of  dependents  (not  a  husband  or  wife)  not  over  18 
years  of  age  or  of  persons  of  any  age  incapable  of  self-support 
because  of  mental  or  physical  defects  (Sec.  216d).  The  tax- 
payer need  not  be  the  head  of  a  family  (Art.  304). 

There  is  no  limit  to  the  number  of  these  $400  exemptions. 
Only  one  person  can  be  the  chief  support;  therefore  only  one 
person  is  allowed  this  exemption  (Bull.  4,  p.  214;  O.  D.  776). 

If  the  children  receive  one-half  of  their  support  from  inde- 
pendent sources,  the  credit  is  not  allowed  (Art.  304). 

149.  How  much  a  "head  of  a  family"  must  contribute. — 

In  order  to  get  the  exemption  as  head  of  a  family  it  is  neces- 
sary to  show  that  you  furnish  more  than  one-half  of  the  sup- 
port of  those  so  connected  with  you  (Bull.  4,  p.  214;  O.  D. 
775). 

150.  Date    for    determining    amount    of   exemption. — The 

amount  of  exemption  depends  on  what  you  are  on  the  last  day 
of  your  taxable  year.  If  on  that  day  you  are  married,  you 
are  allowed  the  married  person's  exemption.  If  on  that  day 
you  are  the  head  of  a  family  or  have  dependents  not  over 
eighteen,  you  are  allowed  those  exemptions.  The  same  rule 
applies  where  the  return  is  for  less  than  a  year. 

The  status  of  a  deceased  person  is  determined  by  what  he 
was  on  the  day  he  died.  The  surviving  spouse  of  a  deceased 
married  person  is  allowed  the  full  exemption  he  or  she  would 

39 


be  entitled  to  by  the  status  at  the  end  of  the  year,  regardless 
of  whether  the  executor  or  administrator  used  up  the  full 
exemption  when  making  the  return  for  the  deceased  (Sec. 
216f  and  Art.  305). 

Example:  A  married  man  dies  leaving  a  wife  and  two 
children  June  15,  1921.  His  net  income  up  to  that  time  was 
$3,900.  He  is  allowed  an  exemption  of  $3,300.  His  wife 
supports  the  children  and  has  an  income  of  $3,500.  She  is 
allowed  the  full  exemption  of  $3,300  as  head  of  a  family  and 
for  the  two  children. 

151.  Normal  tax. — This  is  8%  on  the  net  income  minus  the 
credits,  except  that  in  the  case  of  citizens  or  residents,  it  is 
only  4%  on  the  first  $4,000  (Sec.  210). 

Example:  Net  income  $1'0,000,  credits  $2,500.  Balance 
subject  to  normal  tax  $7,500. 

Tax,  $4,000  @  4%  =  $160.00 
$3,500  @  8%=   280.00 


$440.00  normal  tax. 

152.  Surtax. — This  is  the  tax  on  all  net  income  over  $5,000 
allowing  no  deduction  for  credits.  From  $5,000  to  $6,000  it 
is  1%,  and  then  goes  up  to  65^  on  net  income  exceeding 
$1,000,000.  For  the  year  1922  there  are  new  rates.  The  sur- 
tax starts  at  $6,000  at  1%  and  goes  up  to  50%  on  net  income 
exceeding  $200,000  (Sec.  211). 

The  sum  of  the  normal  tax  and  the  surtax  is  the  total  tax 
to  pay.  Where  the  return  is  for  less  than  a  year,  for  example 
5  months,  only  5/12  of  this  total  is  to  be  paid,  etc.  For  rates 
in  such  a  case  see  also  Sec.  226b  and  Art.  431. 

For  fiscal  years  1920-1  and  1921-2  see  Sec.  205  a  and  b. 

153.  Elective  rate  for  profits  from  sale  of  capital  assets. — 
This  applies  only  to  profits  made  on  sales  made  after  Dec. 
31,  1921.  An  optional  flat  rate  of  12^%  is  permitted  on  such 
profits,  but  the  total  tax,  that  is  this  tax  on  capital  gains  and 
the  regular  normal  tax  and  surtax  on  the  rest  of  the  income, 
must  be  at  least  12^%  of  the  entire  income  (Sec.  206). 

For  capital  assets  included  (see  Sec.  206a  (6)  ). 
If  the  elective  method  is  adopted,  any  personal  exemption 
not  entirely  used  up  by  the  other  income,  may  not  be  used 

40 


to  reduce  the  capital  gains ;  nor  will  any  loss  on  other  income 
be  offset  against  the  capital  gains  (Art.  1651). 

This  elective  rate  may  be  used  by  members  of  partnerships 
and  beneficiaries  of  trusts  for  their  share  of  capital  gains  in 
such  partnerships  and  trusts  (Sec.  206c  and  Art.  1653). 

Credits  on  Tax 

154.  Tax  paid  at  source. — All  taxes  paid  at  the  source  are 
here  allowed  as  a  credit.  In  the  case  of  citizens  or  residents 
this  applies  only  to  taxes  paid  on  the  interest  of  the  so-called 
tax-free  covenant  bonds  in  which  the  corporation  agrees  to 
pay  any  normal  income  tax  on  the  interest  of  the  bonds  up  to 
2%  (Sec.  221b  and  (d)  ). 

This  tax  so  paid  need  not  be  returned  as  extra  income 
(234a  (3)  ).  Where  such  a  bond  is  sold  between  interest  dates, 
the  purchaser  alone  gets  the  benefit  of  this  credit  (Bull.  4,  p. 
232;  O.  D.  830). 

155.  Foreign  income  and  excess  profits  taxes. — Citizens, 
and  alien  residents  whose  countries  allow  a  similar  credit  to 
U.  S.  citizens  are  allowed  a  credit  against  the  tax  for  income 
and  excess  profits  taxes  paid  to  any  foreign  country.  Citizens 
are  also  allowed  such  credit  for  taxes  paid  to  any  possession 
of  the  U.  S.  (Sec.  222a). 

This  credit  on  the  tax  may  not  exceed  in  percentage  the 
percentage  which  the  income  from  sources  without  the  U.  S. 
is  to  the  income  from  all  sources  (Sec.  222a  (5)  ). 

Partners  and  beneficiaries  are  allowed  their  proportionate 
share  of  such  taxes  paid  by  the  partnership  or  trust  (Sec. 
222a  (4)  ). 

Where  the  foreign  tax  is  too  large  to  be  all  credited  here, 
the  remainder  is  allowed  as  a  deduction  (see  Par.  52). 

To  claim  this  credit  Form  1116  must  be  made  out  (Art. 
383). 

Taxes  claimed  on  an  accrual  basis  are  subject  to  redetermi- 
nation when  fixed  (Sec.  222b  and  Art.  384). 

Payment  of  Tax 

156.  When  due. — The  whole  tax  may  be  paid  at  the  time 
of  making  the  return  or  the  taxpayer  may  pay  one-fourth  of 
it  and  the  balance  in  three  equal  payments  payable  every 
three  months  thereafter  (Sec.  250a).    If  any  installment  is  not 

41 


paid  when  due,  the  whole  amount  of  the  tax  becomes  pay- 
able (Sec.  250a).  The  installment  plan  is  not  permitted  when 
the  return  is  not  filed  on  time  or  is  false  or  fraudulent  (Art. 
1001). 

157.  How  made. — Payments  of  tax  may  be  made  by  uncer- 
tified checks  (Sec.  1325).  They  should  be  made  payable  to 
"Collector  of  Internal  Revenue  at  ." 

PARTNERSHIPS,  PERSONAL  SERVICE  CORPORA- 
TIONS AND  FIDUCIARIES 

158.  Partnerships. — Partnerships  are  not  taxed :  only  the 
individual  partners  (Sec.  218a).  The  partnership  must  make 
an  annual  return  on  Form  1065  regardless  of  the  amount  of 
its  net  income  (Sec.  224  and  227a).  This  is  computed  as  in  the 
case  of  an  individual,  except  that  no  deduction  is  allowed  for 
contributions  (Sec.  218c),  but  see  Par.  140.  Only  one  partner 
need  swear  to  it  (Sec.  224). 

For  fiscal  years  1920-1  and  1921-2  see  Sec.  205  (c)  and  Arts. 
334-5. 

It  has  to  file  annually  the  usual  returns  on  Forms  1099  and 
1096  of  information  at  the  source  of  amounts  of  $1,000  or  over 
paid  to  each  person.  Such  returns  are  to  be  filed  on  a  calen- 
dar year  basis  no  matter  what  the  fiscal  year  of  the  partner- 
ship is  (Art.  1071). 

Beginning  in  1922  they  may  Have  the  benefit  of  the  elective 
rate  on  profits  from  the  sale  of  capital  assets  (Par.  153). 

Where  a  partner  withdraws,  or  a  new  partner  comes  in,  a 
new  partnership  is  formed.  The  old  and  the  new  partnership 
each  file  separate  returns  (Bull.  1,  p.  190;  O.  D.  228). 

159.  Personal  Service  Corporations. — Until  Jan.  1,  1922 
they  are  not  taxed  but  are  treated  as  partnerships.  Only  the 
individual  members  are  taxed  (Sec.  218d).    See  Sec.  200  (5). 

It  must  make  an  annual  return  on  Form  1065  (1120  for  1922) 
of  its  net  income  regardless  of  amount.  No  deduction  is 
allowed  for  contributions  (Sec.  227a  and  Sec.  218c  and  d). 

For  a  fiscal  year  ending  in  1921,  see  Art.  337. 

For  a  fiscal  year  ending  in  1922,  the  1921  income  will  be 
reported  on  Form  1065  and  the  1922  on  Form  1120  (see  Art. 
337). 

42 


It  files  annually  the  usual  returns  on  Forms  1099  and  1096 
of  information  at  the  source  of  amounts  of  $1,000  or  over 
paid  to  each  person.  These  are  all  filed  on  a  calendar  year 
basis  (Art.  1071). 

For  alternative  tax  if  present  law  is  declared  unconstitu- 
tional see  Sec.  1332. 

Estates  and  Trusts 

160.  Definition. — Fiduciaries  are  executors,  administrators, 
trustees,  or  receivers  in  charge  of  all  the  property  of  an  in- 
dividual, guardians,  etc.  (Sec.  200  (2)  ). 

A  trust  is  established  when  a  person  is  vested  with  legal 
title  and  is  not  subject  to  the  control  of  others.  It  is  to  be 
distinguished  from  an  agency  (Art.  1522)  and  from  an  asso- 
ciation (Art.  1504). 

161.  Returns. — The  fiduciary  must  file  annually  a  return 
(Sec.  225a). 

The  fiduciary  files  a  return  no  matter  whether  he  or  the 
beneficiary  pays  the  tax  (Sec.  219b)  for: 

(1)  Every  estate  or  trust  with  income  of  $1,000  or  over  (see 
Par.  163).  They  use  Forms  1040  and  1040A  if  they  pay  the 
tax;  if  the  beneficiaries  pay  the  tax  they  use  Form  1041 
(Art.  421).  If  the  tax  is  to  be  paid  partly  by  the  trustee  and 
partly  by  the  beneficiary,  the  trustee  returns  all  the  income 
on  Form  1041  and  returns  on  Form  1040  or  1040A  what  he 
pays  for  (Art.  347). 

(2)  Every  individual  beneficiary  with  income  of  $1,000  or 
over,  if  the  beneficiary  is  single  or  if  he  is  married  and  not  liv- 
ing with  husband  or  wife.     Forms  1040  and  1040A. 

(3)  Every  individual  beneficiary  with  income  of  $2,000  or 
over,  if  married  and  living  with  husband  or  wife.  Forms  1040 
and  1040A. 

(4)  Every  individual  beneficiary  with  gross  income  of 
$5,000.     Forms  1040  and  1040A. 

(5)  Every  nonresident  alien  beneficiary,  regardless  of 
amount  of  income.     Forms  1040  and  1040A. 

(6)  Every  estate  or  trust  of  which  any  beneficiary  is  a  non- 
resident alien  if  no  agent  is  appointed:  (See  Art.  425). 

Where  there  are  two  or  more  fiduciaries  only  one  need  sign 
and  swear  to  it  (Sec.  225b). 

43 


The  net  income  is  computed  on  the  same  basis  as  that  of 
the  individual,  except  that  all  contributions  under  Par.  128 
allowed  under  the  trust  and  chargeable  to  income  may  be 
deducted  when  paid  or  set  aside  (Sec.  219b). 

162.  Expenses  of  administration. — These  expenses  are 
charged  not  to  income  but  to  capital  and  are  therefore  not 
allowed  as  a  deduction.     This  includes   (Art.  293)  : 

(1)  Fees  to  administrator  or  executor. 

(2)  Fee  to  their  attorney. 

(3)  Court  costs. 

Such  extra  expenses  when  incurred  for  carrying  on  a  busi- 
ness may  be  deductible  (Bull.  4,  p.  119;  Sol.  Op.  88). 

163.  Returns  by  trusts  with  same  founder  and  same  trus- 
tee.— Where  two  or  more  trusts  whose  income  is  taxable  to 
the  beneficiaries  are  founded  by  the  same  person  and  are  in 
charge  of  the  same  trustee,  only  one  return  on  1041  need  be 
made  by  the  trustee  (Art.  423). 

164.  Sale  of  capital  assets  by  fiduciaries  of  estates. — As  has 
already  been  stated  (Par.  82)  there  is  no  gain  or  loss  at  the 
death  of  a  decedent  by  transfer  of  title  to  his  property  to  an 
executor  or  administrator  or  by  their  transfer  in  turn  to  a 
trustee.  When  there  is  a  sale,  there  will  be  a  gain  or  loss 
according  as  the  sale  price  is  more  or  less  than  the  market 
value  at  the  date  of  the  death  of  the  decedent  (Arts.  343,  1563 
and  Bull.  2,  p.  34;  O.  1012).  This  rule  applies  to  vested  re- 
mainders (Bull.  3,  p.  50;  Sol.  Op.  35).  But  a  contingent  re- 
mainder is  valued  as  of  the  date  of  the  death  of  the  life  tenant 
(Bull.  3,  p.  53;  O.  D.  727);  where  a  life  tenant's  estate  has 
shrunk  in  value  between  the  date  of  death  and  his  receiving 
it,  there  is  no  loss  (Art.  295). 

Where  property  is  bought  by  the  fiduciary  the  basis  for 
computing  gain  or  loss  is  the  cost,  whether  the  property  is 
sold  by  the  fiduciary  or  by  the  beneficiary  (1-3-28;  I.  T.  1165). 
If  bought  before  March  1,  1913  see  also  Pars.  94-5. 

Where  the  personal  estate  is  sufficient  to  take  care  of  all 
debts  a  gain  or  a  loss  on  sale  of  real  estate  will  not  be  re- 
ported or  deducted  by  the  fiduciary  (Bull.  2,  p.  175;  S. 
1229a).  Such  gain  or  loss  would  be  reported  or  deducted  by 
the  beneficiaries  (see  Art.  342). 

44 


Gain  or  loss  on  the  sale  of  capital  assets  by  a  fiduciary  is 
gain  or  loss  to  the  fiduciary  (Art.  343  and  Bull.  1,  p.  181 ;  O.  D. 
156). 

165.  When  the  fiduciary  pays  the  tax. — (1)  Income  re- 
ceived by  estates  (Sec.  219a).  If,  however,  this  is  paid  or 
credited  to  the  legatee,  heir,  or  other  beneficiary,  the  bene- 
ficiary pays  in  the  amount  so  paid  or  credited  (Sec.  219 
c  and  d). 

(2)  Income  accumulated  for  unborn,  or  unascertained  per- 
sons or  persons  with  contingent  interest  (Sec.  219a). 

(3)  Income  held  for  future  distribution  under  the  terms  of 
the  trust  (Sec.  219a). 

(4)  Income  which  trustee  may  in  his  discretion  accumu- 
late or  distribute  (Art.  342). 

(5)  Income  of  trust  with  nonresident  alien  beneficiary,  if 
the  trustee  makes  the  return ;  see  Par.  164  (6)  and  Art.  425. 

Each  trust  or  estate  is  allowed  as  credits  for  the  normal  tax 
an  exemption  of  $1,000,  and  the  amount  of  dividends  and 
taxable  Liberty  bonds,  etc.,  interest  received  (Sec.  219c  and 
Art.  84a).     This  does  not  apply  to  (5).     See  also  Par.  150. 

It  makes  no  difference  that  the  ultimate  beneficiary  is  a 
tax-exempt  corporation  (Art.  342). 

Each  trust  will  be  taxed  separately  (Bull.  1,  p.  175;  O.  D. 
316). 

166.  When  the  beneficiary  pays  the  tax- — (1)  Income  of 
an  estate  received  from  the  executor  or  administrator  (Sec. 
219c  and  d). 

(2)  Income  to  be  distributed  periodically,  even  though  at 
irregular  intervals.  The  money  need  not  be  actually  dis- 
tributed (Sec.  219d). 

(3)  Income  collected  by  a  guardian  of  an  infant  subject  to 
orders  of  the  court  (Sec.  219d). 

(4)  Income  from  a  revocable  trust  (see  Par.  21). 
For  credits,  etc.,  see  Par.  23. 

Of  course  if  the  fiduciary  has  already  paid  the  tax  the  bene- 
ficiary need  not  pay  again  on  the  same  income  (Art.  344). 


45 


PART  II. 

INCOME  TAX  ON  CORPORATIONS 

This  part  deals  almost  entirely  with  the  tax  on  domestic 
corporations,  those  organized  in  the  United  States,  although 
most  of  its  provisions  are  applicable  to  foreign  corporations. 
For  foreign  corporations  see  in  particular  Sees.  232  and  233. 
For  special  domestic  corporations  see  Sec.  262. 

The  income  tax  on  corporations  is  in  many  respects  similar 
to  the  tax  on  individuals  in  Part  I. 

Miscellaneous  Provisions 

167.  Definition  of  corporation. — The  term  corporation  in- 
cludes associations,  joint-stock  companies,  and  insurance  com- 
panies (Sec.  2  (2)  ). 

For  special  provisions  with  respect  to  insurance  companies 
see  Sees.  242-247. 

An  association  is  distinguished  from  a  partnership  in  that 
its  affairs  are  managed  by  officers  and  the  interests  of  the 
members  are  transferable  without  the  consent  of  the  others 
(Art.  1503). 

A  Massachusetts  Trust  is  not  an  association  (see  Par.  160 
(Art.  1504)  ). 

168.  Corporations  subject  to  the  tax. — All  corporations  not 
expressly  exempted  are  subject  to  the  tax.     This  includes: 

(1)  Corporations  dissolved  during  the  year  (see  Art.  621). 

(2)  Corporations  commencing  business  during  the  year 
(see  Art.  621). 

(3)  Personal  service  corporations,  in  effect  Jan.  1,  1922 
(Sec.  231  (14)  ). 

See  also  the  special  provision  in  Sec.  229  permitting  certain 
individuals  or  partnerships  incorporating  within  four  months 
after  the  passage  of  the  Act  (Nov.  23,  1921)  to  be  taxed  as 
corporations  from  Jan.  1,  1921. 

169.  Tax  -  exempt  corporations.  —  Labor  organizations, 
mutual  savings  banks,  fraternal  societies,  social  clubs,  civic 
organizations,  religious,  charitable,  educational,  etc.,  corpora- 

46 


tions  are  not  subject  to  the  tax.    The  full  list  is  set  forth  in 
Section  232. 

This  applies  to  foreign  as  well  as  domestic  corporations. 

Tax-exempt  corporations  are  subject  to  the  provisions  about 
withholding  and  furnishing  information  at  the  source  (T.  D. 
2693). 

Corporations  claiming  exemption  must  file  an  affidavit  with 
the  collector  as  to  the  facts  together  with  copy  of  charter  and 
by-laws.  Once  the  exemption  is  granted,  nothing  further  need 
be  done,  unless  the  character  of  the  organization  changes 
(Art.  511). 

Returns 

170.  By  what  corporations  made. — All  corporations  not 
tax-exempt  (Par.  168)  must  file  a  return  on  Form  1120  (Sec. 
239a).    This  includes: 

(1)  Corporations  doing  no  business,  if  not  dissolved. 
This  should  be  stated  in  the  return  (see  Art.  621  and  Bull. 
4,  p.  307;  CD.  882). 

(2)  Corporations  with  no  taxable  income  or  without  any 
net  income. 

(3)  Corporation  buying  out  another  corporation  as  well 
as  the  corporation  bought  out  (36-21,  p.  15;  O.  D.  1025). 

Where  there  is  merely  a  transfer  of  the  assets  to  a  new 
corporation  the  stockholders  remaining  the  same,  only  the 
new  corporation  need  file  a  return  for  the  year  including  its 
own  income  and  that  of  its  predecessor  (48-21-1950;  O.  D. 
1119). 

(4)  Personal  service  corporations  (Sec.  239b).  For  form 
see  Par.  159. 

171.  When  and  where  made  and  by  whom  sworn  to. — The 
time  to  make  the  returns  is  the  same  as  for  individuals  (see 
Par.  239)  (Sec.  241a).  Foreign  corporations  not  having  any 
office  or  place  of  business  in  U.  S.  are  subject  to  the  same 
rules  as  nonresident  aliens  (Sees.  241a  and  227). 

The  returns  are  to  be  filed  in  the  district  where  the  prin- 
cipal place  of  business  or  office  or  agency  is.  If  it  has  none  in 
the  U.  S.  it  is  to  be  filed  with  the  collector  at  Baltimore,  Mary- 
land (Sec.  241b). 

The  return  is  to  be  sworn  to  by  the  President,  Vice-Presi- 
dent or  other  principal  officer  and  by  the  Treasurer  or  Assis- 

47 


tant  Treasurer.  In  the  case  of  a  foreign  corporation  without 
an  office  or  place  of  business  in  the  U.  S.  but  having  an  agent 
here,  he  shall  make  the  return  (Sec.  239a). 

For  receivers,  assignees  and  trustees  in  bankruptcy  see  Sec. 
239a. 

For  extensions,  etc.,  see  Pars.  242-4. 

172.  Consolidated  returns. — Beginning  with  Jan.  1,  1922 
affiliated  domestic  corporations  may  if  they  wish  file  a  consol- 
idated return.  Until  then  they  must  file  consolidated  returns 
(Sec.  240a  and  e). 

Corporation  electing  on  or  after  Jan.  1,  1922  to  file  consol- 
idated returns  must  continue  to  do  so  unless  permission  to 
change  is  granted  by  the  Commissioner  (Sec.  240a). 

Corporations  are  affiliated : 

(1)  If  one  corporation  owns  or  controls  substantially  all  the 
stock  of  the  other  or  others. 

(2)  If  the  same  interests  own  or  control  about  in  the  same 
percentages  substantially  all  the  stock  of  two  or  more  cor- 
porations. 

Where  at  least  95%  of  the  stock  is  so  owned  or  controlled 
the  corporations  are  affiliated.  In  the  cases  where  70-94%  is 
so  owned  or  controlled  a  full  disclosure  of  the  facts  must  be 
made  and  it  is  a  question  of  fact  to  be  decided  in  each  case 
(Art.  633). 

Corporations  may  be  affiliated  even  if  the  percentage  is  less 
than  seventy  per  cent. 

173.  Special  provision  for  related  trades  or  business. — See 
Par.  229. 

174.  Returns  of  dividends. — Any  corporation,  not  tax- 
exempt,  including  personal  service  corporations,  may  be  called 
upon  by  the  Commissioner  to  render  a  sworn  return  showing 
amounts  of  dividends  paid  to  each  stockholder,  his  address, 
and  number  of  shares  owned  by  him  (Sec.  254  and  Art.  1060). 
See  Sec.  239c  and  Item  15  of  Schedule  L  of  the  return. 

Forms  1120  and  1065  (see  Pars.  158-9). 

GROSS  INCOME 

175.  General  statement. — All  income  from  all  sources, 
within  or  without  the  U.  S.  is  to  be  reported  (Sec.  233  and 
Art.  503)  except,  that 

48 


1.  Foreign  corporations  report  only  income  from  sources 
within  the  U.  S.  (Sec.  233b). 

2.  Certain  domestic  corporations  have  special  provisions 
(Sec.  262). 

The  gains  arising  from  any  property  or  fund  set  aside  as  a 
sinking  fund  to  secure  the  payment  of  bonds  or  other  in- 
debtedness of  the  corporation  is  income  of  the  corporation, 
and  not  of  the  trustee  in  control  of  the  sinking  fund  (Art. 
542). 

Gross  or  taxable  income  for  corporations  is  the  same  as  in 
the  case  of  individuals  (see  Pars.  2-4)   (Sec.  233a). 

176.  Gross  sales. — See  Par.  34. 

177.  Cost  of  goods  sold.— See  Pars.  35-40. 

178.  Gross  income  from  other  operations. — See  Par.  185. 
This  includes  gains  from  ultra  vires  transactions :  see  Part 
V  B  VII  3  and  Par.  195. 

179.  Taxable  interest  on  obligations  of  the  U.  S.  and  War 
Finance  Corporation  Bonds. — Include  here  whatever  w^ould 
be  taxable  in  the  case  of  an  individual  (Pars.  119-127).  It  is 
here  included  only  for  purposes  of  the  excess-profits  tax  as 
all  interest  from  such  bonds  owned  by  corporations  is  sub- 
ject in  this  connection  only  to  the  excess-profits  tax.  There- 
fore after  Jan.  1,  1922  it  will  no  longer  be  included  as  income 
(Sec.  236a  and  Art.  591). 

Each  of  the  corporations  making  consolidated  returns  (Par. 
172)  is  allowed  the  Liberty  Bond,  etc.,  exemptions  in  Pars. 
122-6. 

180.  Other  taxable  interest.— See  Pars.  11-13. 

181.  Rentals.— See  Pars.  24-29. 

182.  Royalties.— See  Par.  30. 

183.  Earnings  from  personal  service  corporations. — See 
Pars.  17-18. 

184.  Dividends. — Dividends  from  personal  service  corpora- 
tions out  of  earnings  accumulated  on  or  after  Jan.  1,  1918  are 
not  included  (Sec.  201a).  All  other  dividends  are  included 
here.  Below  a  deduction  is  allowed  for  dividends  from  all 
domestic  corporations  (except  under  Sec.  262)  and  certain 
foreign  corporations  (Sec.  234a  (6)  ). 

See  in  general  Pars.  112-118. 

49 


185.  Income  from  other  sources. — See  Par.  128.  Include 
here  apportionable  gain  from  sale  or  retirement  of  its  bonds 
not  reported  as  income  in  any  previous  year  (Art.  545). 

A  corporation  realizes  no  gain  from  the  sale  of  its  capital 
stock  (Art.  543). 

Deductions 

186.  Ordinary  and  necessary  expenses. — Here  are  deducted 
all  expenses  not  called  for  separately  elsewhere,  including: 

1.  Salaries  and  wages  except  those  for  officers,  next  Par. 
187.     See  Pars.  41-47. 

2.  Rent  (see  Par.  48),  (Sec.  234a  (1)  ). 

3.  Insurance  (see  Par.  73). 

4.  Traveling  expenses  (see  Par.  77). 

See  in  general  Pars.  70-72  and  74-76  and  78. 

Expenses  of  organization  are  not  deductible,  being  a  capital 
account,  except  that  if  merely  incidental  they  may  be  de- 
ducted in  the  year  incurred  (Art.  582). 

No  deduction  is  allowed  for  any  charitable  contributions 
(Art.  561)  ;  but  where  they  are  connected  with  the  business  as 
a  contribution  to  a  hospital  or  other  institution  for  employees, 
they  are  deductible  (Art.  562). 

187.  Compensation  of  officers. — See  Pars.  41-47  (Sec.  234a 
(1)). 

188.  Repairs.— See  Par.  53  (Sec.  234a  (1)  ). 

189.  Interest.— See  Pars.  49-50  (Sec.  234a  (2)  ). 
Include  here  apportionable  amount  of  discount  on  sale  of 

its  bonds  and  any  premiums  paid  for  retirement  of  bonds,  not 
deducted  in  any  previous  year  (Art.  545). 

"Interest"  paid  on  preferred  stock,  being  really  dividends, 
is  not  deductible  (Art.  564).  Interest  paid  on  scrip  divi- 
dends is  deductible  (Art.  564). 

1901.  Taxes. — See  Pars.  51-52.  No  deduction  is  allowed 
for  taxes  paid  on  interest  from  bonds  containing  a  tax-free 
covenant  clause  (Par.  260).  Such  tax  paid  need  not  be  re- 
ported as  income  by  the  bondholder  (Sec.  234a  (3)  ). 

SO 


Taxes  paid  for  shareholder  upon  his  interest  as  shareholder 
are  deductible  by  the  corporation  although  not  by  the  stock- 
holder (Sec.  234a  (3)  ). 

191.  Bad  debts.— See  Pars.  63-69  (Sec.  234a  (5)  ). 

192.  Wear  and  tear  (depreciation)  and  obsolescence. — See 
Pars.  54-58  (Sec.  234a  (7)  ). 

193.  Depletion.— See  Sec.  234a  (9). 

194.  Amortization. — See  Sec.  234a  (8). 


195.  Profit  or  loss  on  sale  of  capital  assets. — See  Pars.  81- 
110  (Sees.  233,  234a  (4)  and  234a  (14)  ). 

With  respect  to  the  thirty-day  clause,  this  does  not  apply 
to  incorporated  dealers  in  securities  on  transactions  made  in 
the  ordinary  course  of  their  business  but  does  apply  to  all 
other  corporations  (Sec.  234a  (4)  ). 

A  corporation  suffers  no  gain  or  loss  on  the  sale  or  redemp- 
tion of  its  own  stock.  It  is  entirely  a  capital  account  (Art. 
543).  If  the  assets  of  the  corporation  are  distributed  in  kind 
to  the  stockholders,  there  is  no  gain  or  loss  to  the  corporation 
(Art.  548). 

"Loss"  by  declaration  of  dividends  in  form  of  Liberty  Bonds 
valued  at  market  price  which  is  less  than  cost  is  not  de- 
ductible (Bull.  1,  p.  28;  O.  D.  262).  Where  a  cash  dividend 
is  declared  and  paid  for  by  securities  valued  at  market  price 
below  cost,  the  difference  is  deductible  as  a  loss  (Bull.  4,  p. 
27;  A.  R.  R.  435). 

Losses  on  ultra  vires  transactions  are  not  deductible  (Bull. 
2,  p.  212;  O.  968) ;  for  gains  see  Par.  178. 

For  year  loss  is  deductible,  see  Par.  81. 

196.  Other  losses. — This  refers  to  losses  by  fires,  storms, 
shipwreck,  or  other  casualty,  or  from  theft,  to  the  extent  not 
compensated  for  by  insurance  (see  Pars.  59-62),  (Sec.  234a 
(4)). 

For  year  loss  is  deductible,  see  Pars.  61-2. 

197.  Net  loss. — If  the  business  shows  a  net  loss,  it  may  be 
used  to  offset  income  for  the  next  two  years  as  pointed  out 
in  Par.  80.  In  the  case  of  corporations  this  amount  is  to  be 
cut  down  only  (1)  by  the  excess  if  any  of  tax-exempt  interest 
(Par.  12  and  Par.  121)  over  non-deductible  interest  (Pars.  50 

51 


and  130)  and  (2)  by  certain  depletion  if  any,  without  taking 
the  deduction  for  dividends  (Sec.  204a  and  Art.  1601). 
This  does  not  apply  until  1922  for  loss  in  1921,  etc. 

Example:     Net  loss  of  corporation  as  shown  be- 
fore any  deduction  for  dividends      $5,000 

Tax-exempt  interest    $3,000 

Non-deductible  interest    800 

2,200 

Net  loss  to  be  deducted  from  gains 

of  next  two  years $2,800 

198.  Dividends. — A  deduction  is  allowed  for  all  dividends 
received  from  domestic  corporations  (except  under  Sec.  262) 
and  certain  foreign  corporations  (Sec.  234a  (6)  ). 

Dividends  from  personal  service  corporations  out  of  earn- 
ings 1918-1921  were  not  reported  as  dividends  and  are  not 
deductible  (see  Par.  147). 

Computation  of  Tax 

199.  Credits  for  income  tax. — The  tax  is  on  net  income, 
that  is,  gross  income  minus  the  deductions  (Sec.  232).  In 
computing  the  income  tax  certain  credits  are  allowed : 

(1)  Taxable  interest  on  obligations  of  the  United  States, 
etc.,  reported  above.  As  this  will  not  be  reported  after  1921 
(Par.  179)  there  will  likewise  be  no  credit  for  it  thereafter 
(Sec.  236a). 

(2)  Excess-profits  tax  for  the  same  year  (see  commencing 
at  Par.  206).  This  likewise  will  disappear  after  1921  (Sec. 
236c).  For  fiscal  years  1920-1  and  1921-2  see  Sec.  236c  (1) 
and  (2). 

(3)  Specific  credit  of  $2,000  if  net  income  is  $25,000  or  less. 
The  tax  without  the  credit  is  not  to  exceed  in  any  event  the 
tax  with  this  credit  by  the  amount  of  net  income  in  excess 
of  $25,000  (Sec.  236b).  This  applies  only  to  corporations 
with  income  of  over  $25,000  but  less  than  $25,200. 

Corporations  filing  consolidated  returns  are  allowed  only 
one  credit  of  $2,000  (Sec.  240b). 

200.  Rates — Ten  per  cent,  of  net  income  (minus  credits) 
for  1921.  Twelve  and  one-half  per  cent,  of  net  income  (minus 
credit)  for  1922  and  thereafter  (Sec.  230). 

52 


Example  of  computing  tax  on  net  income  over  $25,000  but 
less  than  $25,200: 

Take  as  net  income $25,150 

Taxable      interest      on      Liberty- 
Bonds,  etc $    750 

Excess-profits  tax 2,250 

Total  credit   $3,000 

$22,150 
10%  =     $2,215 
10%  of  $20,150  (i.  e.  $2,000  credit  allowed)  =         $2,015 
Amount  over  $25,000 150 

$2,165 
The  latter  is  the  tax  due  (Art.  591). 
For  fiscal  years  1920-1  and  1921-2  see  Sec.  205a  and  b. 

201.  No  elective  rate  on  profits  from  sale  of  capital  assets. 

— Corporations   are   not   allowed   any   elective   rate   on    gains 
from  sales  of  capital  assets  (Sec.  206b). 

202.  Evasion  of  surtaxes  by  incorporation. — If  a  corpora- 
tion is  created  or  used  to  prevent  surtaxes  by  allowing  a  sur- 
plus to  accumulate,  an  additional  tax  of  25%  shall  be  imposed 
on  the  net  income  of  the  corporation.  If  all  the  stockholders 
agree,  they  may  be  taxed  upon  their  distributive  shares  as  if 
they  were  members  of  a  partnership. 

If  it  is  a  holding  company  or  if  the  surplus  is  larger  than 
the  reasonable  needs  of  the  business  require  it  shall  be  prima 
facie  proof  of  such  evasion.  No  tax  will  be  imposed  in  the 
latter  case  until  the  Commissioner  certifies  that  such  accumu- 
lation is  unreasonable  for  the  purposes  of  the  business  (Sec. 
220). 

Mere  investment  in  stock  of  another  corporation  is  not  suffi- 
cient (Art.  352).  Ordinarily,  substantially  all  the  stock  must 
be  owned  (Art.  352). 

Investment  in  Liberty  Bonds,  etc.,  is  immaterial  (Art.  353). 

203.  Return  for  less  than  a  year. — In  such  case  first  deduct 
a  proportionate  part  of  $2,000  credit,  if  it  is  deductible  (Art. 
626)  and  also,  for  1921  only,  the  other  two  credits.  Then  put 
the  net  income  on  an  annual  basis  (Sec.  239b  and  Art.  626), 
as  in  Par.  146  and  proceed  to  compute  the  tax. 

53 


204.  Credits  against  tax. — 

(1)  Income  taxes  and  excess-profits  taxes  paid  to  foreign 
countries  or  possessions  of  the  U.  S.  (Sec,  238).  This  credit 
shall  not  exceed  the  same  proportion  of  the  entire  tax  which 
the  net  income  from  sources  without  the  U.  S.  bears  to  the 
entire  net  income. 

This  is  allowed  only  to  domestic  corporations  except  those 
under  Sec.  262  (Sec.  238a  and  f) ;  where  a  domestic  corpora- 
tion owns  a  majority  of  the  voting  stock  of  a  foreign  corpora- 
tion which  pays  the  tax  see  Sec.  238e;  Form  1118  should  be 
filled  out. 

(2)  Taxes  withheld  at  source  on  interest  on  bonds  con- 
taining tax-free  covenant  clauses.  This  concerns  only  foreign 
corporations  not  engaged  in  trade  or  business  in  the  U.  S.  and 
not  having  any  office  or  place  of  business  therein  (Par.  260), 
(Sees.  237  and  221d). 

205.  Payment  of  tax. — See  Pars.  156-7. 

EXCESS  PROFITS  TAX 

206.  General  statement. — The  excess  profits  tax  is  not  in 
effect  after  1921.  It  is  a  heavy  tax  upon  the  net  income,  com- 
puted in  the  same  way  as  for  the  income  tax  (Sec.  320)  in 
excess  of  certain  credits,  two  in  number.  The  one  of  these 
two  credits  is  a  sum  amounting  to  8%  of  the  invested  capital 
for  the  taxable  year  (Sec.  312).  This  necessitates  the  task 
of  computing  the  invested  capital. 

It  applies  to  all  corporations  subject  to  the  income  tax 
(Par.  168),  (Sec.  304a),  except  those  with  net  incomes  of  less 
than  $3,000  (Sec.  304b).  All  corporations  with  incomes  of 
$3,000  or  over  must  fill  out  the  schedules  for  computing  the 
excess  profits  tax  (Sec.  336). 

Computation  of  Invested  Capital,  etc. 

207.  What  included. — Invested  capital  includes: 

(1)  Cash  paid  in  for  stock  (Sec.  326a  (1)  ). 

(2)  Tangible  property,  up  to  its  value  in  cash.  Any  excess 
over  the  par  value  of  the  stock  issued  therefor  may  be  in- 
cluded only  by  the  permission  of  the  Commissioner  (Sec. 
326a  (2)  ).  Notes  may  not  be  included  if  the  local  law  does 
not  allow  the  issue  of  shares  for  notes  (Art.  833). 

(3)  Paid  in  or  earned  surplus  and  undivided  profits  but  not 

54 


surplus  or  undivided  profits  earned  during  the  taxable  year 
(326a  (3)  ). 

Attention  is  here  called  to  the  fact  that  all  dividends  de- 
clared during  the  first  60  days  of  a  taxable  year  are  deemed 
made  out  of  earnings  of  previous  years ;  all  declared  there- 
after are  chargeable  to  the  profits  of  that  year  to  the  extent  of 
such  profits  (Sec.  201f). 

(4)  Intangible  property,  i.  e.,  patents,  copyrights,  goodwill 
and  most  contracts  (Art.  811),  etc.,  not  in  excess  of  their  cash 
value,  the  par  value  of  the  stock  issued  for  them  and  of  25% 
of  the  par  value  of  all  the  stock  outstanding  at  the  beginning 
of  the  taxable  year,  whichever  is  lowest  (Sees.  326a  (4)  and 
(5)  ).  If  the  intangible  property  was  paid  in  before  March 
3,  1917,  the  amount  allowed  therefor  must  not  exceed  25% 
of  the  stock  outstanding  on  March  3,  1917;  if  paid  in  on  or 
after  March  3,  1917,  the  amount  allowed  therefor  must  not 
exceed  25%  of  the  stock  outstanding  at  the  beginning  of  the 
taxable  year. 

For  no  par  value  stock  see  Sec.  325b. 

Invested  capital  does  not  include  borrowed  capital  (Sec. 
326b).  Dividends  credited  to  stockholders  but  left  in  the 
business  constitute  borrowed  capital  if  interest  is  paid  or  the 
stockholders  share  equally  with  or  ahead  of  creditors  (Art. 
813). 

Securities  (except  U.  S.  obligations)  the  income  from  which 
is  not  taxable  to  a  corporation  are  called  inadmissable  assets 
(Sec.  325a).  If  there  are  any,  a  percentage  of  the  invested 
capital  is  to  be  deducted  equal  to  the  percentage  which  the 
amount  of  inadmissable  assets  is  of  the  amount  of  admissable 
(all  other  assets)  and  inadmissable  assets  held  during  the 
year  (Sec.  326c). 

The  invested  capital  is  only  the  average  invested  capital 
throughout  the  taxable  year  (Sec.  326d  and  Art.  853-4).  In- 
come and  excess  profits  taxes  must  be  deducted  as  of  the  date 
due  (Art.  845).  Some  dividends  other  than  stock  dividends 
are  chargeable  to  surplus;  see  Sec.  201f  referred  to  above  in 
this  paragraph  (Arts.  858  and  859). 

Special  attention  is  called  to  the  fact  that  original  values 
must  be  taken.  Appreciation  in  property  is  immaterial  as  well 
as  any  March  1,  1913  values  (Bull.  4,  p.  373;  T.  D.  3181  and 
Art.  831). 

55 


For  reorganizations  after  March  3,  1917  see  Sec.  331. 

208.  Excess-profits  credit. — Eight  per  cent,  of  the  invested 
capital  thus  computed,  and  a  specific  credit  of  $3,000  (the 
latter  is  not  allowed  foreign  corporations  or  certain  domestic 
corporations  under  Sec.  262  [Sec.  312]  )  are  allowed  as  credit 
against  net  income  in  computing  the  tax  (Sec.  312).  Only 
one  credit  of  $3,000  is  allowed  on  consolidated  returns  (Art. 
791). 

For  special  cases  see  Sees.  327-8. 

For  returns  for  less  than  a  year  see  Sees.  305  and  326d  and 
Arts.  718,  732,  751,  761,  855  and  856. 

For  fiscal  years  1920-1  and  1921-2  see  Sec.  335. 

209.  How  the  excess  profits  tax  is  computed. — The  tax  is 

(Sec.  301a) : 

(1)  20%  of  the  net  income  in  excess  of  excess-profits  credit 
and  not  in  excess  of  20%  of  the  invested  capital  plus 

(2)  40%  of  the  net  income  in  excess  of  20%  of  the  invested 
capital. 

The  maximum  tax  is  20%  of  the  income  from  $3,000- 
$20,000  plus  40%  of  the  income  over  $20,000  (Sec.  302). 

Where  part  of  income  is  derived  from  business  within  class 
of  personal  service  corporation  see  Sec.  303. 

For  tax  on  income  from  government  contracts  see  Sec.  301b 
and  Sec.  302. 

210.  Examples. — 

(1)  Corporation  with  invested  capital  of  $120,000 

and  net  income  of  $50,000. 
The    credit    is    8%    of    $120,000  + 

$3,000     $12,600 

20%  of  the  invested  capital  is 24,000 

The   tax   therefore   is    (1)    20%    ($24,000— 

$12,600)     $  2,280 

(2)  40%   ($50,00a-$24,000) 10,400 

$12,680 

(2)  Corporation  with  invested  capital  of  $250,000 

and  net  income  of  $10,000. 
The    credit    is    8%    of    $250,000  + 

$3,000     $23,000 

No  tax  is  due. 

56 


(3)  Corporation  with  invested  capital  of  $20,000 

and  net  income  of  $5,000. 

20%  of  the  invested  capital  is $4,000 

The    credit   is   $l,6004-$3,000 4,600 

—$600 
20%   of— 600  is 0 

Therefore  there  is  no  tax  under  this  first  bracket  and  in 
addition  the  $600  of  the  credit  not  used  up  is  carried  over 
into  the  second  bracket  (Sec.  301c).  If  nothing  were  carried 
over,  $1,000  would  be  taxable,  that  is,  the  difference  between 
the  net  income  and  20%  of  the  invested  capital.  Here  the  tax 
is  40%  (1,000— 600)  =$160.00. 

(4)  Corporation  has  invested  capital  of  $50,000, 

net  income  of  $75,000. 

20%  of  invested  capital  is $10,000 

The  credit  is  4,000  +  3,000  is 7,000 

The  tax  is 

20%   (3,000)     $     600 

40%   (75,000—10,000)    26,000 

$26,600 
We  test  this  by  the  maximum  test 

20%  (20,000—3,000)    $  3,400 

40%   (75,000—20,000)    22,000 


$25,400 
As  this  is  less,  the  excess-profits  tax  is  $25,400. 


57 


PART  III. 

GENERAL  AND  MISCELLANEOUS  PROVISIONS 

The  provisions  of  Part   IIL  unless  expressly  limited  apply 
to  all  taxpayers. 

211.  Name  of  Act  and  when  it  took  effect. — The  name  of 
the  present  revenue  law  is  "Revenue  Act  of  1921."  (Sec.  1.) 
It  was  passed  on  November  23,  1921,  at  3.55  P.  M.  Unless 
it  is  otherwise  stated.  Titles  II  and  III,  the  Income  Tax  and 
Excess  Profits  Tax,  (Sees.  200-337)  take  effect  as  of  Jan.  1, 
1921  (Sees.  263  and  338) ;  the  general  administrative  pro- 
visions in  Title  XIII  (Sees.  1300-1332)  take  effect  as  of  Nov. 
23,  1921  (Sec.  1404). 

RETURNS 
Who  must  file  a  return  and  on  what  Forms 

Return  by  corporation  see  Par.  170. 

Return  by  partnership  see  Par.  158. 

Return  by  personal  service  corporation  see  Par.  159. 

Return  by  fiduciary  see  Par.  161. 

Return  by  nonresident  alien,  or  his  agent  see  Art.  404. 

See  also  Sec.  1307,  providing  that  Commissioner  may  call 
upon  any  one  to  make  a  return  in  order  to  determine  whether 
there  is  a  tax  due. 

212.  Net  income  of  $1,000  or  more. — All  individuals  who 
are  single  or  who  if  married  do  not  live  with  husband  or  wife, 
having  a  net  income  for  the  year  of  $1,000  or  over  must  file  a 
return  (Sec.  223a  (1)  ). 

213.  Net  income  of  $2,000  or  more. — Individuals  who  are 
married  and  live  with  husband  or  wife,  having  a  net  income 
of  $2,000  or  more,  must  file  a  return  (Sec.  223a  (2)  ). 

214.  Returns  by  husband  and  wife. — If  the  combined  net 
income  of  husband  and  wife  is  $2,000  or  over,  each  shall  file 
separate  returns  or  may  file  a  single  joint  return.  They 
must  do  one  or  the  other. 

In  the  case  of  a  joint  return  the  tax,  both  the  normal  tax 
and  surtax,  will  be  computed  on  the  combined  income 
(Sec.  223b). 

58 


Example:  Husband  has  income  of  $1,2CX),  wife  of  $900. 
The  combined  income  is  $2,100.  They  must  file  separate 
or  joint  returns. 

Example:  Husband  has  income  of  $60,000.  The  wife 
loses  $48,000.  The  combined  income  is  $12,000.  They 
may  file  a  joint  return,  and  should  do  so,  as  the  tax  would 
be  considerably  less  than  in  the  case  of  separate  returns. 

Normal  tax  on  $58,000^ ($2,000  exemption) 

$  4,000  at  4% $    160.00 

$54,000  at  8fo 4,320.00 

Surtax  on  $60,000 8,110.00 

Total   tax $12,590.00 

Normal  tax  on  $10,000— ($2,000  exemption) 

$4,000  at  4% $    160.00 

$6,000  at  8% 480.00 

Surtax  on  $12,000 190.00 

830.00 

Difference    $11,760.00 

215.  Combined  net  income  less  than  $2,000. — If  the  one 
has  an  income  of  $2,000  or  over,  but  the  other  has  losses 
which  bring  down  the  income  of  the  one  below  $2,000,  no 
return  need  be  filed  by  either  (Art.  401). 

Example:  Wife  runs  a  business  and  loses  $500.  The 
husband  earns  a  salary  of  $2,400.  The  combined  net  in- 
come is  $1,900  and  no  return  need  be  filed. 

216.  Gross  income  of  $5,000  or  more. — Every  one  with 
gross  income  for  the  year  of  $5,000  or  over  must  make  a  re- 
turn. It  makes  no  difference  what  the  net  income  is,  that  is 
after  deductions  are  allowed  (Sec.  223a  (3)  ). 

Gross  income  means  taxable  income.  See  Par.  2.  In  com- 
puting gross  income  to  determine  whether  a  return  should 
be  filed,  leave  out  all  non-taxable  income,  as  in  Pars.  3,  7,  12, 
114,  and  121.     (See  Art.  71). 

In  the  case  of  a  business,  the  gross  income  is  the  difference 
between  the  sales  and  the  cost.  Any  gross  income  outside 
the  business  would  be  added  to  determine  whether  a  return 
need  be  filed  (Art.  35). 

59 


217.  Husband  and  wife. — If  the  combined  gross  income 
of  husband  and  wife  is  $5,000  or  over,  they  must  file  either 
separate  returns  or  a  joint  return  (Sec.  223b). 

Example:  The  husband  has  gross  income  of  $12,000, 
and  net  income  of  $10,000.  The  wife  has  a  loss  of  $11,000. 
A  return  must  be  filed,  even  though  there  is  in  the  aggre- 
gate a  loss. 

218.  Return  of  minor's  income. — A  minor  (ordinarily  a 
person  under  twenty-one  years  of  age)  if  married,  if  he  has 
an  income  from  property  or  a  trust,  or  if  he  has  been  emanci- 
pated, that  is,  made  free  by  his  parent,  must  make  a  return 
wherever  any  individual  with  his  income  would  have  to  make 
one.  If  he  still  lives  with  his  parent  his  earnings,  not  any 
other  income  (Bull.  3,  p.  116;  Sol.  Op.  14),  must  be  reported 
by  the  parent  as  part  of  the  parent's  return. 

Whenever  a  return  is  to  be  made  by  a  minor  and  the  minor 
is  unable  to  make  the  return,  it  is  to  be  made  out  by  his 
guardian  who  ordinarily  will  be  his  parent  (Sec.  223c). 

219.  Return  by  agent  or  guardian. — When  a  taxpayer  can- 
not make  his  return,  it  is  to  be  made  by  an  agent  authorized  to 
do  so,  or  by  his  guardian  or  other  person  in  charge  of  him  or 
his  property  (Sec.  223c). 

220.  Definition  of  net  income. — Net  income  means  the 
gross  taxable  income  minus  deductions  but  not  minus  the 
credits  allowed  in  Par.  147  (Sec.  212a). 

Example:  A  widower  with  a  dependent  child  under 
eighteen  has  an  income  of  $1,100.  For  the  dependent  child 
he  is  allowed  a  credit  of  $400  (Par.  148).  He  must,  how- 
ever, file  a  return.  In  other  words  a  return  must  be  filed 
even  though  no  tax  may  be  assessed. 

Example:  A  widow  supports  a  child,  age  twenty,  at 
home.  Her  income  is  $1,500.  Although  she  does  not  re- 
ceive the  credit  of  $400  as  the  child  is  not  under  eighteen, 
she  receives  a  credit  of  $2,500  as  head  of  a  family  (Par.  148) 
and  no  tax  will  be  assessed.  She  must  however,  file  a  re- 
turn. 

221.  Status. — Whether  an  individual  is  single  or  married 
or  is  living  with  husband  or  wife  depends  upon  what  he  is  on 

60 


the  last  day  of  the  year  or  period  for  which  he  is  being  taxed 
(Art.  305). 

222.  Forms. — The  return  is  made  on  Form  1040.  If  the 
net  income  is  not  more  than  $5,000  and  if  in  addition  the 
credits  in  Par.  148  when  deducted  from  the  net  income  do  not 
leave  more  than  $4,000  use  Form  1040A  (Art.  402). 

223.  Forms  for  husband  and  wife. — In  the  case  of  husband 
and  wife  if  the  combined  net  income  is  $5,000  or  over.  Form 
1040  must  be  used  no  matter  what  the  separate  net  income  is 
and  whether  they  make  separate  returns  or  joint  returns  (see 
return). 

224.  Method  of  return  by  husband  and  wife  may  be 
changed.— Husband  and  wife  may  change  yearly  from  joint 
to  separate  returns  or  vice  versa  as  they  see  fit  (27-21-1715; 
O.  D.  968). 

225.  The  income  of  dependent  minors. — The  income  of  de- 
pendent minors  must  be  included  to  determine  whether  the 
parent  need  file  a  return  (see  Art.  403). 

Example:  Suppose  a  widow  earns  $800  and  a  dependent 
minor  (i.  e.,  ordinarily  under  21)  earns  $300.  The  widow 
must  file  a  return  as  the  total  is  not  less  than  $1,000. 

226.  Returns  by  executors  and  administrators. — They  file 
a  return  of  the  income  of  the  decedent,  if  the  decedent  would 
have  had  to  file  one  if  alive  (Art.  421).  The  status  of  the 
decedent  is  determined  as  of  the  date  of  death  (Art.  305). 

For  returns  of  the  income  of  the  estate,  see  Par.  161. 

Ancillary  administrators  need  file  no  return  if  the  domicil- 
iary administrator  returns  the  entire  income  of  the  estate 
(Art.  442). 

227.  Returns  by  trustees. — See  Par.  161. 

228.  Returns  by  receivers. — They  return  as  the  taxpayer 
would  (Art.  424). 

229.  Related  trades  or  business. — Where  the  same  interests 
own  or  control  two  or  more  related  trades  or  business  the 
Commissioner  may  compel  them  to  file  consolidated  accounts 

61 


in   order   properly   to   distribute   the   income    between    them 
(Sec.  240d). 
For  affiliated  corporations  see  Par.  172. 

Returns  of  Information  at  Source 

230.  Who  make. — All  making  payments  of  fixed  or  de- 
terminable income  of  $1,000  or  more  a  year  must  render  a  re- 
turn showing  such  payments  (Sec.  256).  A  separate  return 
for  each  one  paid  is  made  on  Form  1099  together  with  a  letter 
on  Form  1096  to  be  sent  to  the  Commissioner  on  or  before 
March  15  (Art.  1071). 

231.  Fixed  or  determinable  income. — Fixed  income  is  like 
salary  or  wages,  which  is  agreed  upon.  Determinable  income 
is  like  commission,  which  can  be  figured  out  by  arithmetic. 
A  lawyer's  fee  or  doctor's  bill  would  not  be  reported,  as  they 
are  not  ordinarily  agreed  upon  or  determinable  by  arithmetic. 
The  income  does  not  have  to  be  paid  at  definite  times  like 
every  week,  etc.  It  should  not  be  confused  with  the  require- 
ments for  withholding  at  the  source  Par.  255  (Art.  1071). 

232.  What  items  need  not  be  reported. — The  following 
items  need  not  be  reported  by  way  of  information  at  source: 

1.  Payments  to  a  corporation  (Art.  1073). 

2.  Payments  of  interest  on  obligations  of  the  U.  S.  (Sec. 
256,  4th  Par.). 

3.  Dividends  by  domestic  corporations,  and  by  foreign  cor- 
porations subject  to  the  corporation  tax  (Sec.  256). 

4.  Payments  for  merchandise,  freight,  storage,  etc.  (Art. 
1073). 

5.  Payments  of  rent  to  real  estate  agents  (Art.  1073). 
The  real  estate  agent  would  have  to  report  his  payments  to 

the  landlord  of  $1,000  or  more. 

233.  Where  made  out. — Where  a  business  has  several 
offices,  the  one  with  the  records  should  make  the  return.  If 
all  of  them  have  records,  the  main  office  should  make  it  (Art. 
1072). 

234.  Interest  on  bonds  of  domestic  or  foreign  corporations. 
— Information    returns    are    required,    no    matter    what    the 

62 


amount  of  interest,  except  where  the  owner  of  the  bond  is  a 
domestic  or  resident  foreign  corporation.  The  ownership  cer- 
tificates must  be  sent  in  as  information  returns.  If  none  are 
filed,  the  withholding  agent  must  make  them  out  and  send 
them  in  (Sec.  256  2d  Par.  and  Art.  1074).     See  Par.  263. 

235.  Income  withheld  from  nonresident  alien.  —  All 
amounts  withheld  at  the  source  from  nonresident  aliens  (Par. 
255  and  260)  must  be  reported  annually  on  Form  1042  (Art. 
1075).     See  Par.  264. 

236.  "Foreign  items."— See  Sec.  256  2d  Par.  and  Articles 
1076-1079.     See  also  Sec.  259. 

237.  Returns  by  brokers. — See  Sec.  255. 

When  Returns  Must  be  Filed 

238.  By  nonresident  aliens. — See  Sec.  227a. 

239.  Individual,  partnership  and  fiduciary  returns. — Re- 
turns are  to  be  made  on  or  before  March  15.  If  the  fiscal 
year  is  not  the  calendar  year,  the  returns  are  to  be  made  on  or 
before  the  fifteenth  day  of  the  third  month  after  the  fiscal 
year  (Sec.  227a). 

240.  Executors  and  administrators. — The  return  of  the  in- 
come of  a  decedent  should  be  made  immediately  after  his  ap- 
pointment. When  his  duties  end,  he  should  file  a  return  im- 
mediately for  the  portion  of  that  taxable  year  (Art.  442).  For 
usual  returns  see  Par.  239. 

241.  Trustees. — When  a  trustee's  duties  end,  he  should  file 
a  return  immediately  for  the  portion  of  that  taxable  year  (Art. 
442).    For  usual  returns  see  Par.  239. 

242.  When  separate  return  for  less  than  twelve  months  is 
made. — Where  a  separate  return  is  required  for  less  than  12 
months  (Par.  250),  the  return  is  to  be  made  on  or  before  the 
fifteenth  day  of  the  third  month  following  the  end  of  such 
period  (Art.  26). 

243.  Date  of  mailing. — The  return  if  mailed  must  be  sent 
in  time  to  reach  the  collector's  office  on  or  before  the  date  due 
(Art.  446). 

63 


244.  Extensions. — In  cases  of  sickness  or  absence,  the  col- 
lector may  grant  extensions  for  not  more  than  30  days.  The 
Commissioner  himself  will  not  ordinarily  take  up  the  question 
of  an  initial  extension.  If  an  extension  is  granted,  a  tentative 
return  may  be  asked  for.  Further  extensions  may  be  made 
only  by  the  Commissioner,  not  extending  beyond  September 
15  or,  in  case  of  a  fiscal  year,  the  due  date  of  the  third  install- 
ment. The  request  for  extensions  must  be  made  before  the 
due  date  of  the  return  (Sec.  1311  Amending  Revised  Statutes 
Sec.  3176  and  Arts.  443  and  444). 

Sickness  of  one  or  more  of  the  officers  of  a  corporation  is 
not  a  sufficient  reason  unless  there  is  no  other  officer  able  to 
make  out  the  return  (Art.  443). 

245.  Where  returns  are  to  be  filed. — The  returns  may  be 
filed  where  the  person  has  his  legal  residence  or  principal 
place  of  business.  If  he  has  neither  in  the  U.  S.  the  return  is 
to  be  filed  with  the  collector  at  Baltimore,  Maryland  (Sec. 
227b). 

For  What  Period  Returns  are  Filed 

246.  The  taxable  year. — The  returns  may  be  made  either 
for  the  preceding  calendar  year  or  for  any  other  period  of 
twelve  months  ending  on  the  last  day  of  a  month,  which  is 
called  a  fiscal  year  (Sec.  200  (1)  ). 

247.  Choice  of  calendar  or  fiscal  year. — A  person  making 
his  first  return  may  choose  which  he  desires,  but  it  must  fol- 
low his  books.  If  he  does  not  keep  books,  he  must  return  for 
the  calendar  year  (Sec.  212b  and  Art.  25). 

248.  Change  in  accounting  period. — If  a  person  desires  to 
change  from  fiscal  to  calendar  year  or  vice  versa,  or  from  one 
fiscal  year  to  a  different  one,  he  must  secure  the  approval  of 
the  Commissioner.  Notice  must  be  given  at  least  thirty  days 
before  the  date  fixed  for  the  end  of  the  new  taxable  year  or 
period  (Art.  26). 

Example:  Fiscal  year  ending  Aug.  31,  1921.  Taxpayer 
desires  to  change  to  calendar  year.  Notice  would  have  to 
be  given  by  Dec.  1,  1920,  being  thirty  days  before  Dec.  31. 

249.  After  permission  granted. — When  permission  has 
been  secured  from  the  Commissioner,  the  change  must  be 
carried  out.  The  taxpayer  may  not  do  as  he  pleases  (Art. 
26). 

64 


250.  Separate  return  caused  by  change. — If  there  is  a 
change  from  a  fiscal  year  to  a  calendar  year,  a  separate  re- 
turn is  to  be  filed  for  the  period  from  the  end  of  the  last 
fiscal  year  and  the  following  December  31  (Sec.  226a). 

Example:  Fiscal  year  ending  August  31,  1921.  A  sep- 
arate return  would  be  filed  for  the  period  from  August  31, 
1920  to  January  1,  1921. 

If  there  is  a  change  from  a  calendar  year  to  a  fiscal  year, 
a  separate  return  is  to  be  filed  for  the  period  ending  with 
the  date  of  the  new  fiscal  year  (Sec.  226a). 

Example:  For  1922  it  is  desired  to  report  for  a  fiscal 
year  ending  Aug.  31,  1922.  A  separate  return  would  be 
filed  from  Jan.  1,  1922  to  Aug.  31,  1922.  Then  it  would 
go  on  regularly  afterwards,  returns  being  made  annually 
on  November  15  (see  Par.  239). 

If  there  is  a  change  from  one  fiscal  year  to  a  different  one, 
a  separate  return  would  be  filed  from  the  end  of  the  pre- 
vious year  to  the  date  of  the  new  fiscal  year  (Sec.  226a). 
Example:     Suppose  fiscal  year  ending  Aug.  31,  1922. 
Change  is  desired  to  fiscal  year  ending  Sept.  30,  1922,    A 
separate  return  would  be  filed  for  the  one  month  of  Sep- 
tember, 1921. 

For  the  tax  rate  on  such  separate  returns  see  Sec.  226b. 
For  computing  the  net  income  of  such  separate  returns 
see  Par.  146. 

Basis  of  Returns 

251.  Cash  or  accrual  basis. — Returns  may  be  made  either 
on  a  cash  basis  or  on  an  accrual  basis  (Sec.  212b  and  Sec. 
213a).  The  former  would  show  only  receipts  and  disburse- 
ments. An  accrual  basis  would  be  required  wherever  it  was 
necessary  to  take  inventory  (Art.  23).  All  the  income  must 
be  treated  entirely  one  way  or  the  other.  Both  bases  may  not 
be  used  for  the  same  year  (Sec.  200  (4)  and  Art.  23). 

The  fundamental  principle  is  that  the  basis  chosen  must 
clearly  reflect  the  income  (Sec.  212b). 

252.  Constructive  receipt. — When  the  return  is  made  on  a 
cash  basis  it  is  not  necessary  that  there  be  an  actual  receipt: 
constructive  receipt  is  sufficient  (Arts.  52  and  53). 

65 


Examples:  Salary  credited  on  the  books;  interest  cred- 
ited by  the  bank;  dividends  set  aside  for  stockholders; 
coupons  on  bonds  when  due,  even  though  not  cut. 

253.  When  inventories  are  required. — In  any  business  con- 
cerned with  the  production,  purchase  or  sale  of  merchandise, 
inventories  must  be  taken  at  the  beginning  and  end  of  the 
year  (Sec.  203  and  Arts.  24  and  1581). 

254.  Change  of  basis. — Permission  to  change  from  one 
basis  to  the  other  must  be  secured  from  the  Commissioner. 
Application  should  be  made  at  least  thirty  days  before  the 
return  is  due  (Art.  23  (3)  ). 

Withholding  At  Source 

255.  Eight  per  cent  deduction. — Where  fixed  or  determin- 
able annual  or  periodical  income  is  payable  to  a  nonresident 
alien  (Par.  265)  or  to  a  partnership  comprised  wholly  or  in 
part  of  one  or  more  nonresident  aliens,  those  having  the  con- 
trol or  custody  of  the  income  must  deduct  eight  per  cent 
thereof  (Sec.  221a). 

This  does  not  apply  to  such  partnerships  having  a  usual 
place  of  business  in  the  U.  S.;  the  partnership  itself  files  a 
return  as  agent  of  the  alien  (Art.  404)  on  Form  1040B  (Art. 
371a). 

256.  Ten  per  cent  deduction  (commencing  in  1922,  twelve 
and  one-half  per  cent). — Where  fixed  or  determinable  annual 
or  periodical  income  is  payable  to  a  foreign  corporation  not 
engaged  in  trade  or  business  in  the  U.  S.  and  not  having  an 
oflfice  or  place  of  business  in  the  U.  S.,  those  having  the  con- 
trol or  custody  of  the  income  must  deduct  ten  per  cent  for 
1921  and  twelve  and  one-half  per  cent  thereafter  (Sec.  237). 

257.  Exceptions  to  withholding  in  Par.  255  and  Par  256. — 

In  the  following  cases  the  income  need  not  be  withheld: 

(1)  Dividends  of  domestic  corporations,  and  of  foreign 
corporations  defined  in  Sec.  216b  (Sec.  221a).  For  dividends 
of  personal  service  corporations  prior  to  Jan.  1,  1922  see  Art. 
363. 

(2)  Interest  on  deposit  with  banking  houses  paid  to  those 
not  engaged  in  business  in  the  U.  S.  and  not  having  an  office 
or  place  of  business  therein  (Sec.  221a). 

66 


(3)  Interest  on  tax-free  covenant  bonds.  This  is  governed 
solely  by  Par,  260. 

(4)  Interest  on  bonds  of  a  domestic  corporation,  if  Form 
1001 C  claiming  personal  exemption  is  filed  with  the  with- 
holding agent  not  later  than  May  1  by  the  nonresident  alien 
(Art.  364b).  Only  nonresident  aliens  whose  gross  income 
from  all  sources  within  the  U.  S.  is  not  more  than  $1,000  may 
thus  claim  exemption.     See  Par.  267. 

258.  Fixed  or  determinable  income. — See  Par.  230  for  defi- 
nition (Art.  362). 

259.  Annual  or  periodical. — This  means  payable  from  time 
to  time,  whether  or  not  at  regular  intervals;  as  for  example, 
commissions  on  sales  credited  throughout  the  period  (Art. 
362). 

260.  Two  per  cent  deduction. — When  domestic  or  resident 
foreign  corporations  issue  bonds  in  which  they  agree  to  be  re- 
sponsible for  any  part  of  the  income  tax  on  such  interest 
called  tax-free  covenant  bonds  they  shall  withhold  2^o  of 
such  interest,  when  payable  to  citizens  or  aliens,  resident  or 
nonresident,  partnerships,  or  foreign  corporations  not  en- 
gaged in  business  or  trade  in  the  United  States  and  not  having 
an  office  or  place  of  business  in  the  U.  S.  (Sec.  221b  and  Sec. 
237).  The  2%  is  to  be  withheld,  even  if  the  corporation  as- 
sumes responsibility  for  less  than  2%. 

The  bonds  of  foreign  corporations  having  a  fiscal  agent  in 
the  U.  S.  are  included  (Art.  361). 

Note  that  such  interest  payable  to  domestic  or  resident  for- 
eign corporations  is  not  to  be  withheld  (Art.  363). 

If  a  trust  deed  under  which  the  bonds  are  issued  contains  a 
tax-free  covenant,  the  tax  must  be  withheld  (Art.  361). 

261.  Exemption  from  2%  withholding. — The  two  per  cent 
tax  payable  to  citizens  or  residents  will  not  be  withheld  in 
cases  where  no  tax  is  due  from  them  because  of  personal  ex- 
emption (see  Par.  148).  They  must  file  Form  1001  claiming 
the  exemption.  These  must  be  filed  not  later  than  February 
first  following  the  taxable  year  and  in  the  case  of  coupons  at 
the  time  of  their  presentation  for  payment  (Art.  363). 

Alien  residents  should  also  file  Form  1078  (Art.  363). 

67 


Nonresident  aliens  who  are  entitled  to  personal  exemption 
may  claim  it  by  filing  Form  1001 B  with  the  withholding  agent 
not  later  than  May  1.  If  so,  the  tax  will  not  be  withheld. 
Only  nonresident  aliens  whose  gross  income  from  all  sources 
within  the  U.  S.  is  not  more  than  $1,000  may  thus  claim  ex- 
emption.   See  Par.  267. 

Foreign  corporations  having  a  place  of  business  or  an  office 
in  the  U.  S.  should  file  Form  1086  to  avoid  withholding  (Art. 
601). 

262.  Owners  unknown. — In  all  cases  where  the  owners  of 
bonds  or  other  like  securities  are  unknown,  the  tax  is  to  be 
withheld  (Sec.  221a  and  b  and  Art.  361). 

263.  Ownership  certificates. — In  the  case  of  all  interest 
payments  on  bonds  or  other  obligations  of  domestic  or  resi- 
dent foreign  corporations  except  tax-exempt  bonds  or  U.  S. 
obligations,  all  owners,  except  domestic  and  resident  foreign 
corporations,  must  file  ownership  certificates  when  presenting 
the  coupons  for  payment.  Where  the  tax  is  to  be  withheld 
Form  1000  is  used,  otherwise  Form  1001  (Arts.  365-367). 

These  must  be  filed  even  though  Form  lOOlB  (Par.  261) 
or  Form  lOOlC  (Par.  257)  has  been  filed  (Art.  364). 

Substitute  certificates  are  permitted  in  certain  cases  (Art. 
368). 

264.  Returns  by  withholding  agents. — Those  withholding 
any  tax  on  interest  from  corporate  bonds  or  other  obligations 
at  the  source  file  with  the  collector  monthly  returns  on  Form 
1012.  An  annual  return  accompanied  by  any  certificates 
claiming  exemption  must  be  filed  on  or  before  March  1  on 
Form  1013.  They  are  responsible  for  the  payment  of  all  such 
taxes  for  which  exemption  certificates  have  not  been  filed ; 
payment  is  to  be  made  on  or  before  June  15  (Sec.  221c  and 
Art.  371). 

In  all  other  cases  of  withholding  an  annual  return  on  Form 
1042  must  be  made  out  and  payment  made  on  or  before  June 
15. 

Where  there  is  no  withholding  by  a  debtor  corporation  on 
interest  on  its  bonds,  monthly  returns  on  the  20th  day  of  each 
month  are  made  on  Form  1096A  together  with  all  the  Forms 
1001  filed.  An  annual  return  on  or  before  March  15  is  made 
on  Form  1096B  to  the  Commissioner  (Art.  373). 

In  the  case  of  a  nonresident  alien  see  Par.  267. 

68 


Nonresident  Alien 

265.  Definition. — A  nonresident  alien  is  an  individual  who 
is  neither  a  citizen  nor  a  resident  of  the  U.  S.  The  only  alien 
whose  status  it  is  difficult  to  determine  is  the  one  actually 
present  in  the  U.  S.  If  he  is  only  a  transient,  here  for  a  short 
stay,  he  is  a  nonresident  alien.  If  he  expects  to  be  here  for 
a  long  time,  even  though  he  intends  to  return  to  his  own 
country,  he  is  a  resident  (Art.  311). 

Once  a  resident  one  remains  so,  until  he  actually  leaves  the 
U.  S.  (Art.  313). 

As  in  other  cases  (Par.  221),  the  status  is  determined  as  of 
the  last  day  of  the  taxable  year  (Art.  313). 

266.  Proof  of  residence  of  alien. — It  becomes  important 
for  residents  in  this  country  to  determine  whether  an  alien  is 
a  resident  or  nonresident.  For  example,  the  employers  of 
nonresident  aliens  have  to  withhold  8%  of  their  salary  (Par. 
255),  unless  exemption  is  claimed. 

Likewise  a  resident  alien  is  taxed  just  like  a  citizen  on  in- 
come from  all  sources ;  a  nonresident  alien  only  on  his  income 
from  sources  within  the  U.  S.  (Sec.  213  (c)  ).  An  alien  is 
presumed  to  be  nonresident.  This  presumption  may  be  over- 
come by  (Art.  312) : 

(1)  Filing  declaration  of  intention  to  be  naturalized. 

(2)  Filing  Form  1078  or  the  equivalent. 

(3)  Proof  of  acts  and  statements  of  the  alien. 

267.  Duty  of  employers. — As  has  been  stated  in  the  pre- 
ceding paragraph,  employers  of  nonresident  aliens  must  de- 
duct from  their  salaries  a  tax  of  8%  (unless  personal  ex- 
emption on  Form  1115  is  claimed  (see  Sec.  217g  and  Art.  315). 
Where  an  employee  has  not  filed  his  first  papers,  an  employer 
should  require  him  to  file  Form  1078  or  similar  paper  to  prove 
he  is  not  a  nonresident.  Otherwise  the  employer  may  find  it 
difficult  to  prove  his  case  where  he  has  not  withheld  the  tax 
(Art.  314). 

On  or  before  March  1  the  employer  must  file  with  the  col- 
lector Form  1042  together  with  all  Forms  1115  filed  with  him, 
if  he  has  any  withholding.  If  he  has  no  withholding,  he  sends 
the  Forms  1115  with  a  letter  of  "transmittal  directly  to  the 
Commissioner  on  or  before  March  15  (Art.  315). 

69 


The  alien  himself  instead  of  filing  Form  1115  may  file  a 
return  and  claim  exemption  (Sec.  217 g  and  Art.  329).  A  non- 
resident alien  is  entitled  to  a  personal  exemption  of  only 
$1,000  (Sec.  216e).  Except  by  filing  Form  1115  as  provided 
in  this  paragraph  or  by  filing  Form  1001 C  (Par.  257)  or  Form 
lOOlB  (Par.  261),  the  alien  to  be  entitled  to  the  exemption 
must  file  a  return  of  all  his  gross  income  from  sources  within 
the  U.  S.  and  may  claim  the  exemption  on  the  return  only 
(Art.  329). 

PART  IV. 
ADMINISTRATIVE  PROVISIONS 

268.  Failure  to  file  a  return  on  time  and  fraudulent  re- 
turns.— A  penalty  of  25%  of  the  tax  will  be  imposed  for  fail- 
ure to  return  on  time  unless  there  is  reasonable  cause  (Sec. 
1311  and  Art.  1004).  A  penalty  of  not  more  than  $1,000  may 
also  be  imposed  (Sec.  253).  In  case  of  a  false  or  fraudulent 
return  a  penalty  of  50%  of  the  tax  will  be  imposed  (Sec. 
1311)  ;  a  wilful  failure  constitutes  a  misdemeanor  and  renders 
one  liable  to  a  fine  of  $10,000  and  imprisonment  for  one  year 
or  both  (Sec.  253). 

If  no  return  is  filed,  or  a  false  or  fraudulent  return  is  filed, 
the  collector  shall  make  the  return  from  such  information  as 
he  can  obtain.  Instead  the  Commissioner  may  make  the  re- 
turn, or  he  may  amend  the  collector's  return.  Such  returns 
shall  be  prima  facie  sufficient  (Sec.  1311). 

For  understated  return  see  Par.  272. 

Payment  of  Tax 

See  Pars.  156-7  and  205.    For  protest  see  Pars.  292  and  293. 

269.  Extension  of  time. — When  an  extension  of  time  for 
filing  a  return  is  granted,  the  time  for  the  payment  of  the  first 
instalment  is  likewise  postponed  (Sec.  250a),  but  not  subse- 
quent instalments  unless  expressly  so  provided  in  the  exten- 
sion (Sec.  250a).  Interest  is  charged  at  the  rate  of  six  per 
cent  per  annum. 

270.  Where  taxpayer  about  to  leave  the  country,  etc. — 
Persons  departing  from  the  country  must  pay  the  tax  for  the 
period  of  the  taxable  year  already  elapsed.    If  they  are  not  in 

70 


default  on  previous  bills,  security  for  such  payment  may  be 
taken.  In  the  case  of  a  citizen  the  provision  as  to  security 
may  be  waived  by  the  Commissioner  (Sec.  250g). 

An  alien  must  first  secure  from  the  collector  or  agent  in 
charge  a  certificate  showing  full  compliance  with  the  tax  law 
(Sec.  250g). 

In  any  case  where  the  Commissioner  thinks  the  collection 
of  taxes  may  be  rendered  ineffectual,  he  may  demand  imme- 
diate payment  of  taxes  for  the  taxable  year  last  past  and  for 
the  part  of  the  current  year  already  elapsed  (Sec.  250g). 

Additional  Assessments 

271.  Penalties  and  interest. — In  all  cases  of  deficiencies 
under  the  1921  Act  (Art.  1001)  interest  will  be  charged  at  the 
rate  of  six  per  cent  per  annum  from  the  time  the  tax  was  due 
(Sec.  250b). 

If  the  deficiency  is  due  to  negligence  or  intentional  disre- 
gard of  the  rules  and  regulations  but  without  intent  to  de- 
fraud (this  latter  applies  only  to  returns  for  1921  and  after 
(Art.  1005)  )  an  additional  5%  of  the  deficiency  plus  interest 
at  the  rate  of  12  per  cent  per  annum  will  be  added  (Sec.  250b). 

If  there  was  fraud  with  intent  to  evade  tax  50%  of  the  de- 
ficiency will  be  imposed  as  an  additional  tax  (Sec.  1311).  This 
constitutes  a  misdemeanor  and  renders  the  taxpayer  liable  to 
a  fine  of  $10,000  or  one  year's  imprisonment  or  both  (Sec. 
253). 

For  final  and  conclusive  assessments  see  Par,  304. 

272.  When  may  be  made. — Additional  assessments  for 
1921  and  succeeding  years  may  be  made  within  four  years 
after  the  return  was  filed  unless  taxpayer  waives  this  limita- 
tion ;  for  taxes  due  under  previous  acts  they  may  be  made 
within  five  years  after  the  return  was  made. 

No  suits  for  additional  taxes  shall  be  brought  more  than 
five  years  after  the  return  was  filed. 

In  the  case  of  a  false  or  fraudulent  return  with  intent  to 
evade  the  tax,  or  where  a  return  was  not  filed,  these  limita- 
tions do  not  apply  (Sec.  250d). 

273.  Income  of  decedent. — Upon  request  from  the  fidu- 
ciary in  charge  of  the  estate,  all  taxes  upon  the  income  of  a 
decedent   in    his   life   time   must   be    finally   assessed    within 

71 


one  year  after  the  request,  except  where  there  is  fraud  (Sec. 
250d). 

274.  Notice  to  taxpayer,  appeal,  etc. — Notice  of  a  proposed 
additional  assessment  must  be  sent  by  registered  mail  to  the 
taxpayer.  He  is  allowed  a  reasonable  time  to  protest  in  writ- 
ing to  the  income  tax  unit  at  Washington  and  ordinarily  will 
be  granted  a  hearing.  For  cause  shown  he  may  be  granted 
an  extension  of  time  to  present  additional  data.  If  the  unit's 
decision  is  adverse  the  taxpayer  is  to  be  notified.  If  there 
was  no  protest  he  is  to  be  notified  that  the  proposed  assess- 
ment will  stand.  In  either  case  he  has  thirty  days  from  the 
mailing  of  the  notice  in  which  to  file  an  appeal  with  the  Com- 
missioner. Appeals  mailed  in  time  so  to  reach  the  Commis- 
sioner will  be  accepted.  No  particular  form  is  necessary  for 
the  appeal.  He  may  on  appeal  submit  additional  facts.  He  is 
ordinarily  entitled  to  a  hearing  and  may  get  an  extension  of 
time  for  cause  shown  by  filing  an  affidavit  (Sec.  250d  and 
Art.  1006). 

After  the  decision  by  the  Commissioner  or  his  agent  or 
after  the  expiration  of  the  thirty  days  if  no  appeal  is  taken, 
the  assessment  may  be  made  (Art.  1006).  If  the  tax  is  not 
paid  then  a  demand  for  payment  within  ten  days  will  issue. 
In  such  cases  payment  must  reach  the  collector  within  the 
ten  days ;  mailing  within  the  ten  days  is  not  sufficient  except 
that  remittances  mailed  in  time  so  to  reach  the  collector  will 
be  accepted  without  penalty  or  interest  (Art.  1007).  The  ten 
days  begins  from  the  mailing  of  the  demand. 

If  no  appeal  is  taken  or  if  the  assessment  is  made  on  appeal 
according  to  the  decision  below  no  claim  for  abatement  will 
be  entertained.  The  tax  must  be  paid  and  the  taxpayer  must 
resort  to  a  claim  for  refund  or  credit  (Art.  1007). 

This  procedure  applies  to  assessments  under  the  1916,  1917, 
1918  or  1921  Acts. 

If  the  collector  or  deputy  collector  has  reason  to  believe 
the  income  in  the  return  is  understated,  after  notice  to  the 
taxpayer,  he  may  upon  proof  increase  the  amount  (Sec.  228). 
In  such  a  case  the  same  procedure  for  an  appeal  to  the  Com- 
missioner, etc.,  is  followed  (Art.  1006). 

275.  Extension  of  time  for  payment. — Where  the  payment 
of  the  additional  assessment  at  the  time  required  would  re- 

72 


suit  in  undue  hardship  to  the  taxpayer,  the  Commissioner 
may,  except  where  there  has  been  negligence  or  fraud  with 
intent  to  evade  the  tax,  extend  the  time  to  not  later  than 
May  23,  1923  (Sec.  250f). 

At  least  8%  interest  must  be  paid.  If  not  paid  at  the  time 
to  which  it  was  postponed,  an  additional  5%  of  the  assess- 
ment and  12%  interest  from  the  original  date  it  was  payable 
will  be  imposed  (Sec.  250f). 

Undue  hardship  is  not  mere  inconvenience.  Form  1127 
must  be  filled  out.    A  bond  may  be  required  (Art.  1014). 

This  applies  also  to  deficiencies  under  the  1917  and  1918 
Acts  (Sec.  250h). 

276.  Examination  of  books. — To  check  up  a  return  or  to 
make  one  where  none  has  been  filed,  the  revenue  agents  or 
inspectors  designated  by  the  Commissioner  may  inspect  all 
books,  papers,  records,  or  memoranda  bearing  on  the  return 
and  may  require  the  attendance  of  any  person  having  any 
knowledge  of  the  matters  and  may  take  testimony  under  oath 
(Sec.  1308). 

No  unnecessary  examinations  are  permitted.  Not  more 
than  one  each  taxable  year  is  permitted,  unless  the  Commis- 
sioner notifies  the  taxpayer  that  the  additional  investigation 
is  necessary  (Sec.  1309). 

Failure  to  Pay  Tax 

277.  Penalties. — If  a  tax  is  not  paid  when  due  and  for  ten 
days  after  notice  and  demand  by  the  collector,  then,  except  in 
cases  of  estates  of  insane,  deceased,  or  insolvent  persons,  an 
additional  tax  of  5%  of  the  amount  due  plus  interest  at  the 
rate  of  12%  per  annum  will  be  added  (Sec.  250e)  ;  a  penalty 
not  exceeding  $1,000  may  also  be  imposed  (Sec.  253).  See 
Par.  274. 

Where  a  taxpayer  becomes  insane,  insolvent,  or  dies  after 
the  ten  days,  the  12%  interest  runs,  but  the  5%  penalty  will 
not  be  imposed. 

Where  a  bona  fide  claim  for  abatement  (Par.  283)  reaches 
(Art.  1007)  the  collector  within  the  ten  days,  only  6%  in- 
terest will  be  charged  on  any  tax  found  to  be  due  (Sec.  250e). 

This  applies  also  to  assessment  and  collection  of  taxes 
under  the  1917  and  1918  Acts  (Sec.  250h). 

278.  What  constitutes  notice. — The  instructions  on  the  re- 

11 


turn  constitute  notice  of  the  first  installment.  For  notices  by 
collectors  to  taxpayers  as  to  the  subsequent  installments  see 
Sec.  250e  2d  Par.  and  Art.  1007. 

Suits  by  Government 

279.  Time  limit. — Except  in  cases  of  fraud  with  intent  to 
evade  tax,  suits  for  collection  of  taxes  may  be  brought  only 
within  five  years  after  the  tax  was  due  (Sec.  1320).  This  does 
not  afifect  suits  pending  Nov.  23,  1921  (Sec.  1320). 

There  is  no  time  limit  when  there  is  fraud  or  failure  to  file 
a  return  (Art.  1008). 

For  suits  to  recover  additional  assessment  see  Par.  272. 

All  suits  by  the  collector  must  be  authorized  by  the  Com- 
missioner (Art.  1008). 

280.  Suits  against  stockholders. — Where  a  corporation  has 
liquidated  and  been  left  without  assets,  the  stockholders  are 
personally  liable  for  all  taxes  to  the  amount  of  assets  turned 
over  to  them  (Bull.  4,  p.  324;  O.  D.  769). 

281.  Attachments,  etc. — The  collector  may  enforce  the  tax 
by  distraint  on  personalty,  if  any,  otherwise  on  real  estate 
(Art.  1009). 

The  tax  should  be  a  lien  on  the  real  estate.  This  may  be 
enforced  by  a  bill  in  equity.  The  lien  is  not  good  against  a 
bona  fide  purchaser  for  value  without  notice  of  the  lien  unless 
and  until  it  is  recorded  (Art.  1010). 

282.  Compromises. — The  Commissioner,  with  the  consent 
of  the  Secretary  of  the  Treasury  and  the  recommendation  of 
the  Attorney-General  may  compromise  any  suit  for  taxes, 
penalties,  or  interest,  except  a  suit  for  taxes  against  a  solvent 
taxpayer.  Before  suit  the  recommendation  of  the  Attorney- 
General  is  not  necessary  (Art.  1011). 

Claims  for  Abatement 

283.  When  made  and  effect  of. — See  Par.  277.  They  do  not 
operate  to  suspend  payment  of  the  tax.  The  collector  may 
collect  the  tax  and  compel  the  taxpayer  to  resort  to  a  claim 
for  refund  (Art.  1032). 

Claims  for  abatement  of  additional  assessments  may  not 
be  made  in  certain  cases  (see  Par.  274). 

284.  Form  of. — Claims  for  abatement  are  made  on  Form 
843  and  should  be  accompanied  by  affidavits  (Art.  1032). 

74 


Claims  for  Credit 

285.  Purpose. — Where  a  taxpayer  has  paid  taxes  and  in- 
stead of  asking  for  a  refund  desires  to  have  such  sum  credited 
to  his  account  against  taxes  due  from  him  to  the  government, 
he  should  file  a  claim  for  credit  on  Form  843.  The  advantage 
is  that  if  his  petition  is  granted  a  credit  will  be  given  to  him 
immediately  so  that  he  need  not  pay  his  own  taxes  while 
waiting  for  the  payment  of  any  refund  allowed  by  the  gov- 
ernment (Sec.  252  and  Art.  1034).  If  any  balance  is  due  a 
refund  will  be  made  (Art.  1034). 

See  in  general  paragraphs  on  refund  commencing  at  Par. 
288. 

286.  May  be  combined  with  claim  for  refund. — A  claim 
for  credit  may  be  filed  while  a  claim  for  refund  (Par.  288)  is 
pending. 

287.  Effect  of  claim  for  credit. — When  a  claim  for  credit 
against  taxes  due  is  filed,  it  has  the  same  effect  with  respect 
to  penalties  and  interest  on  the  taxes  due  as  a  claim  for  abate- 
ment: see  Pars.  277  and  283  (Art.  1035). 

Refunds 

288.  When  must  be  made. — Claims  by  taxpayers  for  re- 
fund or  credit  of  taxes  wrongfully  collected  under  the  1916 
or  following  Acts  must  be  made  within  four  years  after  the 
return  was  due   (Sec.   1316). 

Payment  may  be  made  at  any  time  by  the  government 
(Sec.  1315).  For  claim  for  refund  or  credit  as  condition  prece- 
dent to  suits  by  taxpayers  see  Par.  293. 

No  refund  may  be  made  of  an  additional  assessment,  if  the 
return  was  false  or  fraudulent  or  contained  a  wilful  under- 
statement (Sec.  1323). 

289.  How  made. — Claims  for  refunds  are  made  on  Form 
843.  They  should  be  accompanied  by  a  receipt  (Sec.  251)  or 
by  the  cancelled  check.  The  taxpayer  must  understand  that 
the  burden  is  on  him  to  prove  his  case  (Art.  1036). 

For  refunds  due  to  changes  in  invested  capital  see  Art.  1037. 
No  claim  need  be  filed  in  such  a  case. 

290.  To  whom  made. — They  should  be  handed  in  to  the 
collector  (see  Form  843)  ;  they  may  be  sent  direct  to  the 
Commissioner  of  Internal  Revenue  (Sec.  1316). 

75 


291.  On  examination  of  returns. — If  any  time  within  five 
years  after  the  date  a  return  was  due,  it  is  ascertained  on  an 
examination  of  the  return  under  any  income  tax  act  that  a  tax 
in  excess  of  the  amount  due  has  been  paid,  such  excess  will  be 
credited  against  any  taxes  due  from  the  taxpayer  and  the 
balance  refunded  (Sec.  252).  They  may  be  paid  at  any  time 
if  a  claim  has  been  filed  within  these  five  years  (Sec.  252). 
Excess  profits  taxes  in  excess  of  the  amount,  due  to  change 
in  invested  capital  caused  by  the  Commissioner,  may  be  cred- 
ited or  refunded  at  any  time  (Sec.  252).  This  applies  to  all 
Income  Tax  Acts. 

For  refunds  when  claimed  by  taxpayer  see  Par.  288. 

292.  Interest. — Interest  at  6%  per  annum  is  allowed  in  all 
cases  of  refunds  or  credits  from  six  months  after  the  date  of 
filing  the  claim  for  refund  or  credit  (Sec.  1324a).  The  same 
interest  will  be  allowed  from  the  date  of  payment  (Sec.  1324a) 

(1)  if  paid  under  a  specific  detailed  protest; 

(2)  if  paid  pursuant  to  an  additional  assessment. 

Suits  by  Taxpayers 

293.  Requirements  and  limitations. — 

(1)  Protest  at  time  of  payment?  It  is  recommended  that 
this  be  done  in  doubtful  cases. 

(2)  Claim  for  refund  or  credit  must  have  been  duly  filed 
with  the  Commissioner  (Sec.  1318). 

(3)  Suits  may  not  be  commenced  within  six  months  after 
filing  of  the  claim,  unless  the  Commissioner  renders  a  decision 
before  (Sec.  1318).  A  claim  for  refund  or  credit  is  necessary 
even  though  a  claim  for  abatement  had  been  filed  (Sec.  1318). 
See  Part  V  D  II  c. 

(4)  Suits  may  not  commence  more  than  five  years  after 
payment  (Sec.  1318). 

(5)  No  suit  shall  be  maintained  to  recover  any  additional 
assessment  if  the  return  was  false  or  fraudulent  or  contained 
a  wilful  understatement  (Sec.  1323). 

294.  Against  whom  brought. — Suits  for  recovery  of  taxes 
must  be  brought  against  the  collector  to  whom  the  tax  was 
paid.  They  may  not  be  brought  against  his  successor  in 
office  (Sec.  1318).    See  Part  V  D  II  b. 

Where  the  collector  is  dead  see  Sec.  1310c. 

76 


295.  Interest. — Where  judgment  is  obtained  against  the 
collector  or  the  United  States,  interest  on  the  tax  will  be  in- 
cluded (Sec.  1324b). 

296.  How  money  is  obtained  after  judgment. — When  a 
judgment  is  obtained  against  a  collector  in  order  to  obtain 
the  money  the  following  papers  must  be  filed  (Art.  1051)  : 

(1)  A  claim  for  refund  on  Form  843. 

(2)  Certified  copy  of  final  judgment. 

(3)  Certificate  of  "probable  course"  by  the  judge. 

(4)  Itemized  bill  of  the  costs. 

(5)  Certificate  of  docket  entries. 

297.  Injunctions. — The  courts  are  not  permitted  to  issue 
injunctions  restraining  the  enforcement  of  taxes  (Sec.  3224  of 
the  Revised  Statutes  and  Art.  1050). 

Where  only  the  date  of  collectibility  was  in  issue  a  district 
court  permitted  an  injunction  to  issue :  Polk  vs.  Page,  276 
Fed.  128.  There  has  been  no  decision  by  the  U.  S.  Supreme 
Court. 

Miscellaneous  Provisions 

298.  Regulations. — The  Commissioner,  with  the  approval 
of  the  Secretary  of  the  Treasury  is  authorized  to  make  all 
needful  rules  and  regulations  for  the  enforcement  of  the  Act 
(Sec.  1303). 

Regulations  reversing  previous  regulations  need  not  be  re- 
troactive, except  where  a  court  decision  requires  (Sec.  1314). 

Regulations  not  in  conflict  with  statute  have  the  force  of 
law  (see  Part  V,  D.  1  b). 

299.  Inspection  of  retiurns  and  copy. — Bona  fide  stock- 
holders of  one  per  cent  or  more  of  the  stock  may  be  permit- 
ted by  the  Commissioner  to  inspect  the  returns  of  the  cor- 
poration and  of  its  subsidiaries  (Sec.  257  and  Art.  1093).  For 
rules  of  inspection  in  general  see  Art.  1090. 

A  copy  of  a  return  will  be  furnished  upon  request  in  writ- 
ing by  the  taxpayer  or  his  attorney  or  in  the  case  of  a  de- 
ceased person  by  the  fiduciary  in  charge  of  his  estate  (Art. 
1091). 

n 


300.  Hypothetical  questions. — No  hypothetical  questions 
will  be  answered  by  the  Income  Tax  Department.  Questions 
on  actual  cases  only  will  be  answered.  The  full  facts  includ- 
ing the  names  of  all  parties  concerned  must  be  given  (1-2-26; 
Mimeo.  to  Collectors  2880). 

301.  Committee  on  appeals  and  review. — Upon  request  by 
the  taxpayer,  a  decision  appealed  from  will  ordinarily  be  re- 
ferred to  this  special  Committee  selected  to  assist  the  In- 
come Tax  Unit. 

302.  Registration  of  attorneys,  etc. — Only  attorneys  who 
are  duly  registered  with  the  Bureau  of  Internal  Revenue  may 
represent  taxpayers  at  Washington  before  the  Bureau. 

All  attorneys  must  have  a  power  of  attorney  from  the  tax- 
payers they  represent  (Statement  by  Commissioner,  July  25, 
1921). 

303.  Reopening  of  cases. — Cases  on  which  a  final  decision 
has  been  handed  down  will  not  be  reopened  except  in  the 
event  of  newly  discovered  evidence.  An  explanation  must  be 
given  why  the  evidence  could  not  have  been  presented  before 
(46-21-1927;  T.  D.  3240). 

304.  Final  agreement. — The  Commissioner,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury  may  agree  in  writing 
with  a  taxpayer  that  the  particular  determination  and  assess- 
ment in  question  shall  be  final  and  conclusive.  If  this  is  done, 
no  action  may  thereafter  be  taken  either  by  the  government 
or  the  taxpayer,  except  where  there  has  been  fraud  or  mal- 
feasance or  misrepresentation  of  a  material  fact  (Sec.  1312 
and  Art.  1134). 


78 


PART  V. 

DECISIONS    OF    THE    UNITED    STATES    SUPREME 

COURT   ON  INCOME  TAX  AND  RELATED 

STATUTES   SINCE   1913 


A.     DECISIONS  ON  GENERAL  MATTERS 

I.  The  sixteenth  amendment  only  removed  the  require- 
ment as  to  apportionment. 

Brushaber  v.  Union  Pacific  Railroad  Company,  240 

U.  S.  1  (Jan.  24,  1916). 
Stanton  v.  Baltic  Mining  Co.,  240  U.  S.  103  (Feb.  21, 

1916). 
Tyee  Realty  Company  v.  Anderson  and  Thorne  v. 

Anderson,  240  U.  S.  115  (Feb.  21,  1916). 
Dodge  V.  Brady,  240  U.  S.  122  (Feb.  21,  1916). 

a.  The  sixteenth  amendment  did  not  bring  within  the 
scope  of  the  income  tax  subjects  otherwise  excepted  under 
the  constitution. 

Evans  v.  Gore,  253  U.  S.  245  (June  1,  1920). 

II.  The  Income  Tax  Act  is  constitutional  (1913  Act). 

Brushaber  v.  Union  Pacific  Railroad  Company,  240 

U.  S.  1  (Jan.  24,  1916). 
Stanton  v.  Baltic  Mining  Co.,  240  U.  S.   103   (Feb. 

21,  1916). 
Tyee  Realty  Company  v.  Anderson  and  Thorne  v. 

Anderson,  240  U.  S.  115  (Feb.  21,  1916). 
Dodge  v.  Brady,  240  U.  S.  122  (Feb.  21,  1916). 

III.  Federal  Income  Tax  Acts  may  be  retroactive. 

Brushaber  v.  Union  Pacific  Railroad  Company,  240 
U.  S.  1  (Jan.  24,  1916). 

Held  in  the  case  of  the  1913  Act  passed  Oct.  3, 
1913,  retroactive  to  March  1,  1913. 
Tyee   Realty  Company  v.  Anderson  and  Thorne  v. 
Anderson,  240  U.  S.  115  (Feb.  21,  1916). 

IV.  The  Federal  Income  Tax  Act  should  be  construed 
most  strongly  against  the  government  and  all  doubts  should 
be  resolved  in  favor  of  the  taxpayer. 

Gould  v.  Gould,  245  U.  S.  151  (Dec.  19,  1917). 

79 


V.  Federal  Progressive  Income  Tax  Acts  are  constitu- 
tional.    Decisions  on  surtax  in  the  1913  Act. 

Brushaber  v.  Union  Pacific  Railroad  Company,  240 
U.  S.  1  (Jan.  24,  1916). 

Tyee  Realty  Company  v.  Anderson  and  Thome  v. 

Anderson,  240  U.  S.  115  (Feb.  21,  1916). 
Dodge  V.  Brady,  240  U.  S.  122  (Feb.  21,  1916). 

VI.  The  1909  Corporation  Income  (Excise)  Act  applied 
to  mining  companies. 

Stratton's  Independence  v.  Howbert,  231  U.  S.  399 
(Dec.  1,  1913). 

VII.  A  Massachusetts  Trust  is  not  an  association.  It  is 
therefore  not  taxed  as  a  corporation,  but  the  trustees  are  taxed 
as  fiduciaries. 

Crocker  v.  Malley,  249  U.  S.  223  (March  17,  1919). 
This  is  still  law;  see  Par.  160. 


B.     DECISIONS  RELATING  TO  TAXABLE  AND  NON- 
TAXABLE INCOME 

I.  Profit  on  Foreign  Sales  of  goods  exported  from  the  U. 
S.  by  a  domestic  corporation  is  taxable. 

William  E.  Peck  &  Co.,  Inc.,  v.  Lowe,  247  U.  S.  165 
(May  20,  1918). 
It  was  held  to  be  included  within  taxable  income 
under  the  1913  Act  and  the  Act  so  construed 
was  held  not  to  violate  the  constitutional  pro- 
hibition against  a  "Tax  or  duty  on  articles  ex- 
ported from  any  state." 

This  case  is  still  law,  see  Par.  2.  The  statute  construed  was 
practically  the  same  as  Sec.  213a.  The  1921  statute,  Sec.  217e, 
provides  that  such  profit  in  the  case  of  a  foreign  corporation 
shall  not  be  taxable. 

II.  A  nonresident  alien  is  taxed  on  income  from  stocks 
and  bonds  of  domestic  corporations  and  from  bonds  and  mort- 
gages secured  by  property  situated  in  the  U.  S.  The  stocks, 
bonds,  and  mortgages  were  held  by  an  agent  in  the  U.  S.  who 
collected  the  income. 

80 


DeGanay  v.  Lederer,  250  U.  S.  Z76  (June  9,  1919). 

This  was  under  the  1913  Act  taxing  nonresident 
aliens  on  "the  entire  net  income  from  all  prop- 
erty owned  in  the  U.  S,"  It  was  also  stated 
that  there  was  no  question  that  Congress  had 
the  power  to  tax  such  income. 

This  case  is  law  under  the  present  statute,  Sec.  217a. 

III.  Alimony  is  not  income  (under  the  1913  Act). 

Gould  V.  Gould,  245  U.  S.  151  (Dec.  19,  1917). 
This  is  still  law,  see  Par.  3.     The  statute  construed  was 
practically  the  same  as  Sec.  213a. 

IV.  Salaries  of  Federal  Judges  appointed  before  the  In- 
come Tax  Act  cannot  be  taxed. 

Evans  v.  Gore,  253  U.  S.  245  (June  1,  1920). 

1918  Act. 

It  was  held  to  be  against  the  constitutional  pro- 
vision (Art.  Ill,  Sec.  1),  that  their  salaries 
should  not  be  diminished  during  their  term  of 
office. 

The  present  Act,  Sec.  213a,  includes  in  gross 
income  the  salaries  of  the  Federal  Judges  and 
of  the  President  of  the  United  States,  in 
whose  case  there  is  a  similar  constitutional 
provision  (Art.  II,  Sec.  1,  Par.  6).  This  would 
apply  only  to  Judges  appointed  after  the  Act 
and  to  a  President  elected  after  the  Act.  As 
the  rates  in  the  1921  Act  do  not  exceed  the 
rates  in  the  1918  Act,  Sec.  213a  applies  to  all 
Judges  appointed  or  Presidents  elected  since 
the  date  of  the  passage  of  the  1918  Act,  Feb. 
24,  1919  (Art.  32). 

V.  The  excess  of  an  excessive  reserve  held  by  an  Insur- 
ance Company  is  not  income. 

Maryland  Casualty  Co.  v.  United  States,  251  U.  S. 
342  (Jan.  12,  1920). 

Under  the  1909  Corporation  Excise  Act  and  the 
1913  Income  Act. 

For  present  law  see  in  general  Sees.  242-247.     Cf.  also  the 
new  provision  as  to  a  reserve  for  bad  debts.  Pars.  68  and  191. 

VI.  Premiums  in  the  hands  of  the  agents  are  income  to  the 
Insurance  Company. 

81 


Maryland  Casualty  Co.  v.  United  States,  251  U.  S. 
342  (Jan.  12,  1920). 

Under  the  1909  Corporation  Excise  Act  and  the 
1913  Income  Act.  Such  premiums  were  held 
included  in  the  language  "net  income  re- 
ceived," receipt  by  the  agent  being  receipt  by 
the  Company. 

For  the  present  law  see  Sees.  242-247. 

VII.     Profit   from   the   sale    o£   capital   assets.     See    com- 
mencing at  Par.  81  and  Par.  195. 

1.  A  tax  on  the  gain  from  the  sale  of  capital  assets  is  per- 
mitted by  the  Sixteenth  Amendment. 

Merchants  Loan  &  Trust  Co.  v.  Smietanka,  255  U.  S. 

509  (March  28,  1921). 
Goodrich  v.  Edwards,  255  U.  S.  527  (March  28,  1921). 
Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921). 
See  Stratton's  Independence  v.  Howbert,  231  U.  S. 

399,  415  (Dec.  1,  1913). 
See  Eisner  v.  Macomber,  252  U.  S.  189,  207  (March 

8,  1920). 

2.  Profits  from  the  sale  of  capital  assets  are  included  in 
the  Income  Tax  Act. 

Merchants  Loan  &  Trust  Co.  v.  Smietanka,  255  U.  S. 
527  (March  28,  1921). 

1916  Act  as  amended  by  the  1917  Act.  The  in- 
tent was  pretty  clear.  One  section  was  like 
the  present  Sec.  213a.  Of  course,  the  present 
Section  202  admits  of  no  doubt  that  they  are 
taxed. 
Eldorado  Coal  &  Mining  Co.  v.  Moyer,  255  U.  S.  522, 

(March  28,  1921).     Same  Act. 
Goodrich  V.  Edwards,  255  U.  S.  527  (March  28,  1921). 

Same  Act. 
Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921). 
1916  Act  unamended. 

See  also  decisions  that  such  profits  are  income  under  the 
1909  Corporation  Excise  Act. 

Doyle  V.  Mitchell  Bros.,  247  U.  S.  179  (May  20,  1918). 
Hays  V.  Gauley  Mt.  Coal  Co.,  247  U.  S.  189  (May  20, 

1918). 
U.  S.  V.  Cleveland,  Etc.,  Railway  Co.,  247  U.  S.  195 
(May  20,  1918). 

82 


3.  The  profit  from  the  sale  of  capital  assets  on  a  single 
transaction  is  taxable.     One  need  not  be  a  dealer. 

Merchants  Loan  &  Trust  Co.  v.  Smietanka,  255  U.  S. 
509.     1916  statute  amended. 

Cf.  Walsh  V.  Brewster,  255  U.  S.  536  (March  28, 
1921),  where  profits  from  occasional  sales  were  held 
taxal3le.     1916  statute. 

Cf.  Hays  v.  Gauley  Mt.  Coal  Co.,  247  U.  S.  189  (May 
20,  1918),  case  of  single  sale  under  the  1909  Cor- 
poration Excise  Act.  Note  that  it  was  an  ultra 
vires  transaction. 

This  is  still  the  law,  as  the  language  of  the  1916  statute  is 
similar  to  the  1921  Act. 

4.  Property  acquired  before  March  1,  1913. 

(a)  Where  the  sale  price  is  greater  than  the  March  1, 
1913  value,  and  the  cost,  but  the  March  1,  1913  value  is 
greater  than  the  cost,  only  the  difference  between  the  sale 
price  and  the  March  1,  1913  value  is  taxed  by  the  statute. 

See  Lynch  v.  Turrish,  247  U.  S.  221  (June  3,  1918). 
1913  Income  Tax  Act.  Statute  similar  to  present 
Sec.  213a.  The  present  statute  specifically  adopts 
this  rule  in  Sec.  202a.     See  Par.  94. 

Cf.  the  cases  under  the  1909  Corporation  Excise  Act. 

Doyle  V.  Mitchell  Bros.,  247  U.  S.  179  (May  20,  1918). 

Hays  V.  Gauley  Mt.  Coal  Co.,  247  U.  S.  189  (May 
20,  1918). 

Here  the  facts  did  not  include  a  statement  of 
the  March  1,  1913  value  and  so  the  taxpayer 
recovered  nothing. 

U.  S.  V.  Cleveland,  Etc.,  Railway  Co.,  247  U.  S.  195 
(May  20,  1918). 

(b)  Where  the  sale  price  is  greater  than  the  March  1, 
1913  value,  but  less  than  the  cost,  there  is  no  taxable  in- 
come under  the  statute. 

Goodrich  v.  Edwards,  255  U.  S.  527  (March  28, 
1921).     1916  Act. 

The   present   law    Sec.    202a    provides    so    explicitly.      See 
Par.  94. 

(c)  Where  the  sale  price  is  greater  than  the  March  1, 
1913  value,  and  the  cost,  but  the  cost  is  greater  than  the 

83 


March  1,  1913  value,  the  statute  taxes  only  the  difference 
between  the  sale  price  and  the  cost. 

Goodrich   v.    Edwards,   255    U.    S.    527    (March   28, 

1921)    1916  Act. 
Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921) 
1916  Act. 

The  present  statute  in  Sec.  202a  provides  so  explicitly.    See 
Par.  94. 

(d)  Where  the  sale  price  is  greater  than  the  March  1, 
1913  value  but  only  equal  to  the  cost,  there  is  no  gain  under 
the  statute. 

Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921) 
1916  Act. 

The  present  statute  in   Sec.  202a  provides  likewise.     See 
Par.  94. 

5.     Interest  on  the  cost  is  not  to  be  added  as  part  of  the  cost 
under  the  statute. 

Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921) 
1916  Act. 

For   four   years   after   the   purchase,   the   bonds 

were  not  interest-bearing.     The  plaintiff  was 

not  allowed  to  add  interest  on  his  investment 

to  the  cost. 

Hays  V.  Mt.  Gauley  Coal  Co.,  247  U.  S.   189  (May 

20,  1918). 

Under  the  1909  Corporation  Excise  Act. 
This  is  also  the  present  law.     See  Sec.  202a. 

VIII.     Dividends. 

1.     Stock  dividends  are  not  taxable  under  the  16th  amend- 
ment. 

Eisner  v.  Macomber,  252  U.  S.  189  (March  8,  1920). 

It  was  said  that  the  profit  from  the  sale  of  stock 

dividends  would  be  taxable. 

Walsh  V.  Brewster,  255  U.  S.  536  (March  28,  1921). 

Cf.  Towne  v.  Eisner,  245  U.  S.  418  (Jan.  7,  1918)_. 

Held  that  under  the   1913  Act  stock  dividends 

were  not  income. 
Eisner  v.  Macomber  was  decided  under  the  1916 
Act  which  expressly  taxed  stock  dividends. 
For  present  statute  see  Sec.  201d  and  Par.  116. 

84 


2.  Dividends  in  the  form  of  stock  of  other  corporations  are 

"  Peabody  v.  Eisner,  247  U.  S.  347  (June  3,  1918). 
U.  S.  V.  Phellis,  42  Sup.  Ct.  Rep.  63  (Nov.  21,  1921). 
In  this  case  the  stock  received  was  that  of  a  cor- 
poration to  which  all  the  assets  of  the  cor- 
poration in  question  were  transferred,  but  the 
value  of  the  corporation's  stock  was  still  worth 
par.     The  dividend  was  not  greater  in  amount 
than   the   surplus   and   profits.     The   corpora- 
tions were  not  identical. 
Rockfeller  v.  U.  S.  and  N.  Y.  Trust  Co.  and  Harkness 
V.  Edwards,  42  Sup.  Ct.  Rep.  68  (Nov.  21,  1921). 
Two  cases  similar  to  the  Phellis  case.     In  the 
one  the  stock  was  given  out  by  the  old  cor- 
poration.    In  the  other  the  stock  was  given 
directly  to  the  stockholders  by  the  new  cor- 
poration.    It  was  also  held  that  this  made  no 
difference. 

Present  Law :  Dividends  in  the  form  of  stock  of  other  cor- 
porations are  taxable,  see  Par.  117.  See  Sec.  202c  (2)  where 
the  law  provides  that  in  reorganizations  where  new  stock  is 
received  in  place  of  the  old  stock,  no  tax  will  be  imposed. 
This  would  not  affect  the  law  as  laid  down  by  the  Phellis 
and  Rockfeller  cases,  as  no  stock  was  given  up  in  those  cases : 
see  Par.  117. 

3.  Dividends  out  of  earnings  before  March  1,  1913. 
(a)  Under  the  1913  Act  they  were  taxed. 

Lynch  v.  Hornby,  247  U.  S.  339  (June  3.  1918). 

It  was  also  held  that  this  was  constitutional. 
Peabody  v.  Eisner,  247  U.  S.  347  (June  3,  1918). 

But  see  Southern  Pacific  Co.  v.  Lowe,  247  U.  S.  330 

(June  3,  1918). 
And  Gulf  Oil  Corporation  v.  Lewellyn,  248  U.  S.  71 
(Dec.  9,  1918)  under  the  1913  Act. 
In  both  these  cases  it  was  held  that  where  the 
dividends  came  from  subsidiaries  entirely  con- 
trolled by  the  plaintiff,  etc.,  were  only  book- 
keeping entries,  and  the  proceeds  were  within 
the  control  of  the  plaintiffs  before  March   1, 
1913,   they   were   not   income,   but   capital   on 
March  1,  1913. 

Present  Law:  such  dividends  are  tax-exempt  (Sec.  201a 
and  b)  ;  all  the  earnings  on  or  after  March  1,  1913  must  be 
first  distributed.     See  Par.  113. 

85 


C.     DECISIONS  RELATING  TO  DEDUCTIONS 

I.  Alimony  paid  is  not  deductible.     Statement  made  in 

Gould  V.  Gould,  245  U.  S.  151  (Dec.  19,  1917). 

Under  the  1913  Act.  This  is  also  law  today,  see 
Par.  71. 

II.  Interest. 

Anderson  v.  Forty-Two  Broadway  Co.,  239  U.  S.  69 
(Nov.  8,  1915). 

It  was  held  that  Congress  had  the  power  to  limit 
in  the  case  of  corporations  the  deduction  for 
interest  to  interest  on  indebtedness  not  ex- 
ceeding in  amount  the  capital  of  the  corpora- 
tion. 

This  statute  has  been  repealed  and  there  is  no  such  limita- 
tion in  the  present  law.     See  Pars.  189  and  49. 

III.  Taxes. 

U.  S.  V.  Woodward,  41  Sup.  Ct.  Rep.  615   (June  6, 
1921). 

Held  that  the  Federal  estate  tax  paid  by  an 
estate  could  be  deducted  from  its  income.  Act 
of  1918.  This  is  clearly  written  into  the  pres- 
ent law,  Sees.  214a  (3)  and  234a  (3).  See  also 
Pars.  134  and  190. 

IV.  Depreciation  and  Depletion  by  mining  companies. 

(a)  Congress  may  fix  5%  of  the  gross  value  at  the  mine 
of  its  output  as  the  limit  for  yearly  depreciation. 

Stanton  v.  Baltic  Mining  Co.,  240  U.  S.  103  (Feb.  21, 
1916). 

Decision  under  the  1913  Act. 
For  the  present  law  see  Sees.  214a  (10)  and  234a  (9). 

(b)  Cf.  the  decisions  under  the  1909  Corporation  Excise 
Act  that  mining  companies  might  not  make  any  deduction 
for  depletion 

Stratton's  Independence  v.  Howbert,  231   U.  S.  399 

(Dec.  1,  1913). 
Von  Baumback  v.  Sargent  Land  Co.,  242  U.  S.  503 

(June  15,  1917). 
United  States  v.  Biwabik  Mining  Co.,  247  U.  S.  116 

(May  20,  1918). 

86 


Goldfield  Consolidated  Mines  Company  v,  Scott,  247 
U.  S.  126  (May  20,  1918). 

The  first  and  fourth  cases  were  cases  of  owner- 
ship;  the  second  and  the  third  were  cases  of 
leases. 

V.     In  case  of  Insurance  Companies. 

(a)  Maryland  Casualty  Co.  v.  United  States,  251  U. 
S.  342  (Jan.  12,  1920). 

1913  Act  and  1909  Corporation  Excise  Act.  Re- 
serves may  not  be  set  aside  for  ordinary  run- 
ning expenses.  See  Sec.  234a  (10)  and  Sees. 
242-247. 

(b)  Penn  Mutual  Life  Insurance  Co.  v.  Lederer,  252 
U.  S.  523  (April  19,  1920). 

Cash  dividends  not  used  to  reduce  premiums  are 
not  deductible.    Under  the  1913  Act. 

See  present  law  Sees.  242-247. 

D.     DECISIONS  RELATING  TO  ADMINISTRATIVE 
PROVISIONS 

I.  Regulations. 

(a)  Congress  may  delegate  to  the  Secretary  of  the  Treas- 
ury the  power  to  make  regulations  in  enforcement  of  the 
Income  Tax  Act. 

Brushaber  v.  Union  Pacific  Railroad  Co.,  240  U.  S.  1 
(Jan.  24,  1916).     See  Sec.  1303  and  Par.  298. 

(b)  Regulations,  not  in  conflict  with  any  statute,  have 
the  force  of  law. 

Maryland  Casualty  Co.  v.  U.  S.,  251  U.  S.  342  (Jan. 
12,  1920). 
See  Par.  298. 

II.  Suits  by  taxpayers. 

(a)  No  injunction  will  be  used  to  restrain  enforcement 
of  the  Income  Tax  Act,  even  if  the  Act  is  unconstitutional. 

Dodge  v.  Osborn,  240  U.  S.  118  (Feb.  21,  1916). 

Court  so  construed  Sec.  3224  of  the  revised  stat- 
utes and  held  that  it  was  constitutional. 

This  is  the  present  law.     See  Par.  297. 

(b)  A  suit  for  recovery  of  taxes  may  not  be  brought 
against  the  successor  in  office  of  the  collector  who  collected 
the  tax. 

87 


Smietanka  v.  Indiana  Steel  Co.,  42  Sup.  Ct.  Rep.  1 
(Oct.  24,  1921). 

This  is  the  present  law;  see  Par.  294. 

(c)  No  suit  for  recovery  of  taxes  may  be  brought  unless 
a  claim  for  refund  has  been  filed,  even  if  a  claim  for  abate- 
ment had  previously  been  filed. 

Rock  Island,  Etc.,  R.  R.  v.  United  States,  254  U.  S. 
141  (Nov.  22,  1920). 

For  present  law  see  Par.  293. 

(d)  Under  the  1913  Act  appeals  to  the  Commissioner  had 
to  be  made  within  two  years  from  the  dates  for  the  original 
returns,  not  the  amended  returns. 

Maryland  Casualty  Co.  v.  U.  S.,  251  U.  S.  342  (Jan. 
12,  1920). 
This  provision  has  been  repealed ;  cf.  in  another 
connection  Sec.  250d  and  Par.  272. 

(e)  In  a  suit  to  recover  taxes  paid  the  taxpayer  will  not 
recover  all  the  taxes  paid,  if  on  any  theory  any  tax  is  due 
to  the  government  from  the  plaintiff:  the  plaintiff  will  re- 
cover only  the  difference,  if  any. 

Crocker  v.  Malley,  249  U.  S.  223  (March  17,  1919). 
The  defendant  had  taxed  the  plaintiffs  as  an 
association.  Held  they  were  not  taxable  as  an 
association  but  were  taxable  as  trustees  and 
the  trustees  could  recover  only  the  difference 
between  the  two  taxes. 

This  is  the  present  law.     See  T.  D.  3251. 

E.     EXCESS  PROFITS  TAX  DECISION 

Invested  capital  under  the  1917  Act  means  original  invest- 
ment and  does  include  any  later  appreciation  in  value  of  the 
assets  and  so  construed  the  Act  is  constitutional. 

La  Belle  Iron  Works  v.  United  States,  41  Sup.  Ct. 
Rep.  528  (May  16,  1921). 

This  is  also  tBe  law  under  the  1921  statute.     See  Par.  207. 


PART  VI. 

REVENUE  ACT   OF    1921 

Titles  I,  II,  III,  XIII,  XIV. 


A.     IMPORTANT  CHANGES  AND  NEW  PROVISIONS 
IN  THE  REVENUE  ACT  OF  1921. 

Sec.  201b.     Second  Sentence.     Pars.  86  and  195. 

Tax-exempt  dividends,  out  of  earnings  or  appreciation  of 
property  before  March  1,  1913,  are  to  be  added  to  the 
sale  price  of  stock  in  determining-  any  loss  on  the  sale. 

Sec.  201c.     Pars.  110  and  195. 

For  computing  gain  on  liquidating  dividends  only  returns 
of  capital  are  considered ;  dividends  out  of  earnings  be- 
fore March  1,  1913  are  not  included.  See  above  Sec. 
201b. 

Sec.  202a  (2).     Pars.  93  and  195. 

In  determining  the  gain  or  loss  on  gifts  from  living  per- 
sons after  Dec.  31,  1920,  the  basis  is  the  cost  or  market 
value  of  the  property  given  as  a  gift  to  the  donor  or  if 
he  received  it  as  a  gift  from  a  living  person,  then  the  cost 
or  market  value  to  the  last  person  who  did  not  receive  it 
as  a  gift  from  a  living  person. 

Sec.  202  (c).     Pars.  101-6,  195. 

Rules  as  to  gain  or  loss  on  exchange  of  property. 

Sec.  204.     Pars.  80  and  197. 

Net  loss  in  business  for  any  year  may  be  offset  to  a  cer- 
tain amount  against  the  net  income  of  the  two  succeed- 
ing years  commencing  in  1922  for  loss  in  1921,  etc. 

Sec.  206.     Pars.  153  and  201. 

An  alternative  tax  on  gains  from  the  sale  of  certain  cap- 
ital assets  on  or  after  Jan.  1,  1922,  is  provided. 

Sec.  211a  (2).     Par.  152. 

Beginning  in  1922  the  surtax  is  decreased,  the  maximum 
rate  being  50%. 


Gross  Income  of  Individuals 

Sec.  213b  (1).     Pars.  3  and  175. 

Insurance  proceeds  on  the  death  of  an  insured  are  not 
taxable,  no  matter  to  whom  paid. 

Sec.  213b  (4).     Pars.  121  and  179. 

Interest  from  all  Postal  Savings  Certificates  is  wholly 
tax-exempt;  wholly  tax-exempt  interest  need  not  be  re- 
ported at  all. 

Sec.  213b  (9).    Par.  9. 

Allotments  under  War  Risk  Insurance  and  the  Vocational 
Rehabilitation  Acts,  or  pensions  from  the  United  States 
for  military  or  naval  service  are  not  taxable. 

Sec.  213b  (10).     Par.  12. 

Dividends  or  interest  from  mutual  domestic  building  and 
loan  associations  are  exempt  from  1922-1926  to  an  amount 
not  exceeding  $300  (yearly). 

Sec.  213b  (11). 

Rental  value  of  home  furnished  to  minister  as  part  of  his 
compensation  is  not  taxable. 

Deductions  Allowed  to  Individuals 

Sec.  214a  (1).     Pars.  10,  47,  77. 

The  entire  amount  expended  for  board  and  lodging  as 
part  of  traveling  expenses  connected  with  a  business  is 
deductible  as  expense. 

Sec.  214a  (2).     Pars.  130-1. 

Interest  paid  to  purchase  or  carry  wholly  tax-exempt 
U.  S.  obligations  issued  after  Sept.  24,  1917,  is  deductible 
only  if  the  obligations  were  originally  subscribed. 

Sec.  214a  (3).     Pars.  52  and  133. 

Taxes  on  a  stockholder's  interest  paid  for  a  stockholder 
by  the  corporation  are  not  deductible  by  the  taxpayer. 

Sec.  214a  (5).     Par.  86. 

Thirty-day  clause  on  sale  of  stock  or  securities  not  con- 
nected with  the  business  on  or  after  Nov.  23,  1921. 

Sec.  214a  (6).     Pars.  62,  81,  136. 

The  Commissioner  may  allow  losses  to  be  deducted  for 
years  other  than  those  in  which  they  were  sustained. 

90 


Pars.  60  and  138. 

The  basis  for  determining  losses  from  destruction  or 
damage  to  property:  the  March  1,  1913  value  shall  be 
taken  as  the  basis. 

Sec.  214a  (7).     Pars.  63-69  and  141-2. 

Bad  debts  may  be  charged  off  in  part  as  well  as  entirely; 
an  alternative  method  of  setting  up  a  reserve  is  permitted. 

Sec.  214a  (11).     Pars.  139-140. 

Contributions  to  community  charities  whether  incorp- 
orated or  not  are  deductible;  also  those  to  posts  of  the 
American  Legion  or  the  Women's  Auxiliary  Units  there- 
of; also  those  to  domestic  political  units  for  public  pur- 
poses. 

Sec.  214a  (12).     Pars.  108-9. 

Gain  derived  from  proceeds  received  on  destruction  of 
property  is  cut  down  if  the  proceeds  are  reinvested  or 
set  aside  as  a  replacement  fund. 

Sec.  215b.     Par.  82. 

A  life  tenant  is  not  allowed  any  deduction  for  shrinkage 
in  his  estate. 

Credits  Allowed  Individuals 
Sec.  216a.     Pars.  147, 129. 

Dividends  from  certain  foreign  corporations  only  are  al- 
lowed as  a  credit  against  net  income. 

Sec.  216c.     Pars.  148-9. 

Married  persons  living  with  husband  or  wife  and  heads 
of  families  are  allowed  a  personal  exemption  of  $2,5CX) 
on  incomes  not  over  $5,000;  special  rule  as  to  the  ex- 
emption on  income  not  over  $5,020. 

Sec.  216d.     Par.  148. 

$400  is  allowed  for  each  dependent  child  under  eighteen, 
etc. 

Sec.  216e.     Pars.  265-7. 

All  nonresident  aliens  get  personal  exemption  of  $1,000, 
but  no  other  or  additional  exemption. 

Sec.  217. 

Restatement  of  taxable  income  of  nonresident  aliens. 

91 


Sec.  219f. 

Provisions  for  taxing-  income  from  trust  created  by  em- 
ployers for  employees. 

Sec.  220.     Par.  202. 

25%  additional  tax  on  income  of  corporations  formed  or 
used  to  evade  surtaxes  with  option  to  stockholders  to  be 
taxed  as  partners. 

Sec.  221a.     Pars.  255  and  257. 

Tax  may  be  withheld  at  source  from  partnerships  com- 
posed wholly  or  in  part  of  nonresident  aliens. 
Tax  may  not  be  withheld  on  interest  on  bank  deposits  by 
nonresident  aliens. 

Sec.  223a  (3).     Pars.  216-17. 

All  individuals  with  gross  income  of  $5,000  or  over  must 
make  returns. 

Sec.  225a  (3).     Pars.  226-7  and  161. 

Fiduciaries  must  make  returns  for  all  beneficiaries  with 

gross  income  of  $5,000  or  over. 

Sec.  226c.     Par.  146. 

Where  income  is  reported  by  individuals  for  a  taxable 
period  less  than  twelve  months,  it  is  to  be  put  on  an  an- 
nual basis. 

Sec.  229.     Par.  168. 

Corporations  formed  during  four  months  after  passage  of 
Act  fXov.  23,  1921)  may  elect  to  be  treated  as  corpora- 
tions from  Jan.  1,  1921,  if  their  income  was  at  least  20^ 

of  their  invested  capital. 

Sec.  230.     Par.  200. 

Corporation  tax  rates  commencing  in  1922  are  twelve  and 
one-half  per  cent,  of  net  income  in  excess  of  credit. 

Sec.  231  (14).     Pars.  168-9. 

Personal  Service  Corporations  are  to  be  treated  as  ordi- 
nary corporations  commencing  in  1922. 

Sec.  232. 

Restatement  of  net  income  of  foreign  corporations. 

Sec.  233b. 

Restatement  of  gross  income  of  foreign  corporations. 

92 


Deductions  and  Credits  Allowed  Corporations 
Sec.  234a  (2).     Par.  189. 

Same  as  Sec.  214a  (2). 
Sec.  234a  (3).     Par.  190. 

Taxes  on  stockholder's  interest  paid  by  the  corporation 

are  deductible  by  the  corporation. 

Pars.  190  and  12. 

Taxes  paid  on  interest  from  tax-free  covenant  bonds  are 

not  deductible  by  the  corporation ;  the  amount  of  such 

taxes  need  not  be  returned  as  additional  income  by  the 

obligees. 

Sec.  234a  (4).     Par.  195. 

The  thirty-day  clause  (Sec.  214a  (5)  )  applies  to  all  cor- 
porations except  dealers  in  securities. 
Pars.  195-6. 
Same  as  Sec.  214a  (6). 

Sec.  234a  (5).     Par.  191. 
Same  as  Sec.  214a  (7), 

Sec.  234a  (6).     Par.  198. 

Dividends  from  certain  foreign  corporations  only  are  al- 
lowed as  a  deduction. 

Sec.  234a  (14).     Par.  195. 
Same  as  Sec.  214a  (12). 

Sec.  235. 

Same  as  Sec.  215b. 

Sec.  235b.     Par.  199. 

$2,000  credit  is  allowed  to  corporations  with  net  income 
of  S25,CX)0  or  less;  special  provisions  for  corporations  with 
net  income  over  S25,OO0  and  less  than  525,200. 

Sec.  238a.     Par.  204. 

Limit  to  credit  against  tax  that  may  be  taken  for  foreign 
income  and  excess-profits  taxes  paid  by  corporation. 

Sec.  238e.     Par.  204. 

Credit  allowed  to  domestic  corporations  owning  majority 
of  voting  stock  of  certain  foreign  corporations  paying  for- 
eign income  and  excess  profits  taxes. 

Sec.  239b.     Par.  203. 

Net  income  of  corporation  returning  for  less  than  twelve 
months  is  put  on  annual  basis. 

93 


Sec.  239c.     Par.  174. 

Corporations  are  to  make  return  of  earnings  during  the 
year  distributed  or  ordered  to  be  distributed  to  the  stock- 
holders. 

Sec.  240a.     Par.  172. 

Affiliated  corporations  commencing  in  1922  have  the  op- 
tion of  making  consolidated  returns. 

Sec.  240d.     Pars.  229  and  173. 

Provision  as  to  apportionment  of  income  in  related 
trades  or  business. 

Administrative  Provisions 

Sec.  250b.     Par.  271. 

6%  interest  must  be  paid  on  deficiencies  in  tax  under  the 
1921  Act  even  if  underpayment  made  in  good  faith. 

Par.  271. 

If  there  is  intentional  disregard  of  the  rules  without  in- 
tent to  defraud,  a  5%  penalty  and  12%  interest  on  addi- 
tional assessments  are  imposed. 

Sec.  250d.     Par.  272. 

Additional  assessments  under  1921  and  following  returns 
must  be  made  within  four  years. 

Par.  273. 

In  case  of  income  of  a  deceased  person  final  assessment 
must  be  made  within  one  year  of  request  by  person  in 
charge  of  the  estate. 

Pars.  274  and  283. 

Before  an  additional  assessment  may  be  made  the  tax- 
payer must  be  given  at  least  30  days'  notice  by  regis- 
tered mail  with  opportunity  for  appeal  and  hearing.  No 
claim  for  abatement  is  permitted  after  such  assessment. 

Sec.  250f.     Par.  275. 

In  cases  of  undue  hardship,  an  extension  not  later  than 
May  23,  1923  may  be  granted  for  payment  of  an  addi- 
tional assessment. 

Sec.  250g.     Par.  270. 

Provisions  as  to  requiring  security  from  citizens  leaving 
the  country  may  be  waived. 

94 


Sec.  252.     Par.  291. 

Refunds  or  credits  may  be  made  at  any  time  on  excess 
payments  due  to  changes  in  invested  capital  caused  by 
the  Commissioner. 

Sec.  1312.     Par.  304. 

Provision  for  final  assessment  by  agreement  between  tax- 
payer and  Commissioner. 

Sec.  1314.     Par.  301. 

Regulations  need  not  be  retroactive. 

Sec.  1316.     Par.  288. 

Claims  for  refund  and  claims  for  credit  must  be  pre- 
sented within  four  years. 

Sec.  1318.     Par.  293. 

Suits  for  recovery  of  taxes  must  be  brought  not  sooner 
than  six  months  after  the  filing  of  the  claim  unless  the 
Commissioner  has  rendered  a  decision  before  then  and 
not  later  than  five  years  from  the  date  of  payment  of  the 
tax. 

Sec.  1320.     Par.  279. 

Except  in  case  of  fraud  with  intent  to  evade  tax,  etc.,  no 
suit  by  the  government  for  the  collection  of  internal  rev- 
enue taxes  may  be  begun  after  5  years  from  the  time 
such  taxes  were  due. 


Sec.  1324a.     Par.  292. 

Provisions  for  interest  on  claims  for  refund. 

Sec.  1324b.     Par.  295. 

Provision  for  interest  in  judgment  against  collector  or 
the  United  States. 

Sec.  1328.     Pars.  122-127  and  179. 

New  Liberty  Bond  exemptions. 

B.     PROVISIONS    IN    THE    REVENUE   ACT    OF    1921 
NOT  APPLICABLE  UNTIL  1922. 

Sec.  204.     Pars.  80  and  197. 

The  net  loss  allowance  does  not  apply  until  1922  for  net 
loss  in  1921,  etc. 

95 


Sec.  206.     Pars.  153  and  201. 

The  alternative  tax  on  gains  from  the  sale  of  capital  assets 
applies  only  to  sales  on  or  after  Jan.  1,  1922. 

Sec.  211a  (2).     Par.  152. 

The  lower  surtax  rates  do  not  apply  until  1922. 

Sec.  213a  (10).    Par.  12. 

Interest  on  dividends  from  mutual  domestic  building  and 
loan  associations  is  tax-exempt  up  to  $300  for  5  years 
commencing  in  1922. 

Sec.  231  (14).     Pars.  168-9. 

Personal  Service  Corporations  are  treated  as  all  corpora- 
tions commencing  in  1922. 

Sec.  240a.     Par.  172. 

The  option  given  to  affiliated  corporations  of  making  con- 
solidated or  separate  returns  does  not  apply  until  1922. 

C.     PROVISIONS  IN  THE  REVENUE  ACT  OF  1921  OF 
LIMITED  DURATION. 

Sec.  213b  (10).     Par.  12. 

Dividends  on  interest  from  mutual  domestic  buildings 
and  loan  associations  are  exempt  only  from  1922-1926. 

Sec.  218d.     Par.  159. 

Personal  Service  Corporations  are  treated  like  partner- 
ships up  to  Jan.  1,  1922. 

Sec.  229.     Par.  168. 

Certain  corporations  formed  during  four  months  after 
passage  of  Act  (Nov.  23,  1921)  may  elect  to  be  treated 
as  corporations  from  Jan.  1,  1921. 

Sec.  301.     Pars.  206-210. 

Excess-profits  tax  in  effect  only  for  1921.  With  this  goes 
the  provision  in  Sec.  201f  as  to  dividends  paid  within  the 
first  sixty  days  of  a  taxable  year,  etc. 

Sec.  1328.     Pars.  122-127  and  179. 

Liberty  Bond  exemption  of  $125,000  expires  July  2,  1923. 
Liberty  Bond  exemption  of  $50,000  runs  from  July  2, 
1923-July  2,  1926. 

Liberty  Bond  exemption  of  $30,000  first  4|s  expires  July 
2,  1923. 

96 


D.     TEXT  OF  THE  REVENUE  ACT  OF  1921 

Titles  I,  II,  III,  XIII,  XIV. 
Approved  by  the  President,  November  23,  1921,  3.55  P.  M. 

AN  ACT 

To  reduce  and  equalize  taxation,  to  provide  revenue,  and  for  other 
purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the 
United  States  of  America  in  Congress  assembled, 

TITLE  I.— GENERAL  DEFINITIONS. 

Section  1.     That  this  Act  may  be  cited  as  the  "Revenue  Act  of  1921." 
Sec.  2.     That  when  used  in  this  Act — 

(1)  The  term  "person"  includes  partnerships  and  corporations,  as 
well  as  individuals ; 

(2)  The  term  "corporation"  includes  associations,  joint-stock  com- 
panies, and  insurance  companies ; 

(3)  The  term  "domestic"  when  applied  to  a  corporation  or  part- 
nership means  created  or  organized  in  the  United  States ; 

(4)  The  term  "foreign"  when  applied  to  a  corporation  or  partner- 
ship means  created  or  organized  outside  the  United  States  ; 

(5)  The  term  "United  States"  when  used  in  a  geographical  sense 
includes  only  the  States,  the  Territories  of  Alaska  and  Hawaii,  and  the 
District  of   Columbia; 

(6)  The  term  "Secretary"  means  the   Secretary  of  the  Treasury; 

(7)  The  term  "Commissioner"  means  the  Commissioner  of  Internal 
Revenue ; 

(8)  The  term  "collector"  means  collector  of  internal  revenue; 

(9)  The  term  "taxpayer"  includes  any  person,  trust  or  estate  sub- 
ject to  a  tax  imposed  by  this  Act; 

(10)  The  term  "military  or  naval  forces  of  the  United  States"  in- 
cludes the  Marine  Corps,  the  Coast  Guard,  the  Army  Nurse  Corps,  Fe- 
male, and  the  Navy  Nurse  Corps,  Female,  but  this  shall  not  be  deemed 
to  exclude  other  units  otherwise  included  within  such  terms ;   and 

(11)  The  term  "government  contract"  means  (a)  a  contract  made 
with  the  United  States,  or  with  any  department,  bureau,  officer,  commis- 
sion, board,  or  agency,  under  the  United  States  and  acting  in  its  behalf, 
or  with  any  agency  controlled  by  any  of  the  above  if  the  contract  is  for 
the  benefit  of  the  United  States,  or  (b)  a  subcontract  made  with  a  con- 
tractor performing  such  a  contract  if  the  products  or  services  to  be 
furnished  under  the  subcontract  are  for  the  benefit  of  the  United  States. 
The  term  "government  contract  or  contracts  made  between  April  6,  1917, 
and  November  11,  1918,  both  dates  inclusive"  when  applied  to  a  contract 
of  the  kind  referred  to  in  clause  (a)  of  this  subdivision,  includes  all 
such  contracts  which,  although  entered  into  during  such  period,  were 
originally  not  enforceable,  but  which  have  been  or  may  become  enforce- 
able by  reason  of  subsequent  validation  in  pursuance  of  law. 

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TITLE  II.— INCOME  TAX. 

(General  effective  date  of  this  Title,  January  1,  1921.) 

PART  I.— GENERAL   PROVISIONS. 

Definitions. 
Sec.  200.     That  when  used  in  this  title — 

(1)  The  term  "taxable  year"  means  the  calendar  year,  or  the  fiscal 
year  ending  during  such  calendar  year,  upon  the  basis  of  which  the  net 
income  is  computed  under  section  212  or  section  232.  The  term  "fiscal 
year"  means  an  accounting  period  of  twelve  months  ending  on  the  last 
day  of  any  month  other  than  December.  The  first  taxable  year,  to  be 
called  the  taxable  year  1921,  shall  be  the  calendar  year  1921  or  any  fiscal 
year  ending  during  the  calendar  year  1921 ; 

(2)  The  term  "fiduciary"  means  a  guardian,  trustee,  executor,  ad- 
ministrator, receiver,  conservator,  or  any  person  acting  in  any  fiduciary 
capacity  for  any  person,  trust  or  estate; 

(3)  The  term  "withholding  agent"  means  any  person  required  to  de- 
duct and  withhold  any  tax  under  the  provisions  of  section  221  or  section 
237; 

(4)  The  term  "paid,"  for  the  purposes  of  the  deductions  and  credits 
under  this  title,  means  "paid  or  accrued"  or  "paid  or  incurred,"  and  the 
terms  "paid  or  incurred"  and  "paid  or  accrued"  shall  be  construed  accord- 
ing to  the  method  of  accounting  upon  the  basis  of  which  the  net  income 
is  computed  under  section  212;  and 

(5)  The  term  "personal  service  corporation"  means  a  corporation 
whose  income  is  to  be  ascribed  primarily  to  the  activities  of  the  principal 
owners  or  stockholders  who  are  themselves  regularly  engaged  in  the 
active  conduct  of  the  affairs  of  the  corporation  and  in  which  capital 
(whether  invested  or  borrowed)  is  not  a  material  income-producing  fac- 
tor; but  does  not  include  any  foreign  corporation,  nor  any  corporation  50 
per  centum  or  more  of  whose  gross  income  consists  either  (1)  of  gains, 
profits,  or  income  derived  from  trading  as  a  principal,  or  (2)  of  gains, 
profits,  commissions,  or  other  income,  derived  from  a  government  contract 
or  contracts  made  between  April  6,  1917,  and  November  11,  1918,  both 
dates  inclusive. 

Dividends. 

Sec.  201.  (a)  That  the  term  "dividend"  when  used  in  this  title  (ex- 
cept in  paragraph  (10)  of  subdivision  (a)  of  section  234  and  paragraph 
(4)  of  subdivision  (a)  of  section  245)  means  any  distribution  made  by 
a  corporation  to  its  shareholders  or  members,  whether  in  cash  or  in 
other  property,  out  of  its  earnings  or  profits  accumulated  since  February 
28,  1913,  except  a  distribution  made  by  a  personal  service  corporation 
out  of  earnings  or  profits  accumulated  since  December  31,  1917,  and 
prior  to  January  1,  1922. 

(b)  For  the  purposes  of  this  Act  every  distribution  is  made  out  of 
earnings  or  profits,  and  from  the  most  recently  accumulated  earnings  or 
profits,  to  the  extent  of  such  earnings  or  profits  accumulated  since  Feb- 
ruary 28,  1913;  but  any  earnings  or  profits  accumulated  or  increase  in 
value  of  property  accrued  prior  to  March  1,  1913,  may  be  distributed  ex- 
empt from  the  tax,  after  the  earnings  and  profits  accumulated  since  Feb- 
ruary 28,  1913,  have  been  distributed.  If  any  such  tax-free  distribution 
has  been  made  the  distributee  shall  not  be  allowed  as  a  deduction  from 
gross  income  any  loss  sustained  from  the  sale  or  other  disposition  of  his 
stock  or  shares  unless,  and  then  only  to  the  extent  that,  the  basis  provided 

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in  section  202  exceeds  the  sum  of  (1)  the  amount  realized  from  the  sale 
or  other  disposition  of  such  stock  or  shares,  and  (2)  the  aggregate  amount 
of  such  distributions  received  by  him  thereon. 

(c)  Any  distribution  (whether  in  cash  or  other  property)  made  by 
a  corporation  to  its  shareholders  or  members  otherwise  than  out  of  (1) 
earnings  or  profits  accumulated  since  February  28,  1913,  or  (2)  earnings 
or  profits  accumulated  or  increase  in  value  of  property  accrued  prior  to 
March  1,  1913,  shall  be  applied  against  and  reduce  the  basis  provided  in 
section  202  for  the  purpose  of  ascertaining  the  gain  derived  or  the  loss 
sustained  from  the  sale  or  other  disposition  of  the  stock  or  shares  by  the 
distributee. 

(d)  A  stock  dividend  shall  not  be  subject  to  tax  but  if  after  the  dis- 
tribution of  any  such  dividend  the  corporation  proceeds  to  cancel  or  re- 
deem its  stock  at  such  time  and  in  such  manner  as  to  make  the  distribution 
and  cancellation  or  redemption  essentially  equivalent  to  the  distribution 
of  a  taxable  dividend,  the  amount  received  in  redemption  or  cancellation 
of  the  stock  shall  be  treated  as  a  taxable  dividend  to  the  extent  of  the 
earnings  or  profits  accumulated  by  such  corporation  after  February  28, 
1913. 

(e)  For  the  purposes  of  this  Act,  a  taxable  distribution  made  by 
a  corporation  to  its  shareholders  or  members  shall  be  included  in  the 
gross  income  of  the  distributees  as  of  the  date  when  the  cash  or  other 
property  is  unqualifiedly  made  subject  to  their  demands. 

(f)  Any  distribution  made  during  the  first  sixty  days  of  any  taxable 
year  shall  be  deemed  to  have  been  made  from  earnings  or  profits  accumu- 
lated during  preceding  taxable  years ;  but  any  distribution  made  during 
the  remainder  of  the  taxable  year  shall  be  deemed  to  have  been  made 
from  earnings  or  profits  accumulated  between  the  close  of  the  preceding 
taxable  year  and  the  date  of  distribution,  to  the  extent  of  such  earnings 
or  profits,  and  if  the  books  of  the  corporation  do  not  show  the  amount 
of  such  earnings  or  profits,  the  earnings  or  profits  for  the  accounting 
period  within  which  the  distribution  was  made  shall  be  deemed  to  have 
been  accumulated  ratably  during  such  period.  This  subdivision  shall  not 
be  in  effect  after  December  31,  1921. 

Basis  For  Determining  Gain  or  Loss. 

Sec.  202.  (a)  That  the  basis  for  ascertaining  the  gain  derived  or 
loss  sustained  from  a  sale  or  other  disposition  of  property,  real,  personal, 
or  mixed,  acquired  after  February  28,  1913,  shall  be  the  cost  of  such  prop- 
erty; except  that — 

(1)  In  the  case  of  such  property,  which  should  be  included  in  the 
inventory,  the  basis  shall  be  the  last  inventory  value  thereof ; 

(2)  In  the  case  of  such  propertj%  acquired  by  gift  after  December 
31,  1920,  the  basis  shall  be  the  same  as  that  which  it  would  have  in  the 
hands  of  the  donor  or  the  last  preceding  owner  by  whom  it  was  not  ac- 
quired by  gift.  If  the  facts  necessary  to  determine  such  basis  are  un- 
known to  the  donee,  the  Commissioner  shall,  if  possible,  obtain  such  facts 
from  such  donor  or  last  preceding  owner,  or  any  other  person  cognizant 
thereof.  If  the  Commissioner  finds  it  impossible  to  obtain  such  facts,  the 
basis  shall  be  the  value  of  such  property  as  found  by  the  Commissioner 
as  of  the  date  or  approximate  date  at  which,  according  to  the  best  in- 
formation the  Commissioner  is  able  to  obtain,  such  property  was  ac- 
quired by  such  donor  or  last  preceding  owner.  In  the  case  of  such  prop- 
erty acquired  by  gift  on  or  before  December  31,  1920,  the  basis  for 
ascertaining  gain  or  loss  from  a  sale  or  other  disposition  thereof  shall  be 
the  fair  market  price  or  value  of  such  property  at  the  time  of  such  ac- 
quisition ; 

99 


(3)  In  the  case  of  such  property,  acquired  by  bequest,  devise,  or 
inheritance,  the  basis  shall  be  the  fair  market  price  or  value  of  such 
property  at  the  time  of  such  acquisition.  The  provisions  of  this  paragraph 
shall  apply  to  the  acquisition  of  such  property  interests  as  are  specified 
in  subdivision   (c)   or   (e)   of  section  402. 

(b)  The  basis  for  ascertaining  the  gain  derived  or  loss  sustained 
from  the  sale  or  other  disposition  of  property,  real,  personal,  or  mixed, 
acquired  before  March  1,  1913,  shall  be  the  same  as  that  provided  by 
subdivision  (a)  ;  but — 

(1)  If  its  fair  market  price  or  value  as  of  March  1,  1913,  is  in  excess 
of  such  basis,  the  gain  to  be  included  in  the  gross  income  shall  be  the 
excess  of  the  amount  realized  therefor  over  such  fair  market  price  or 
value ; 

(2)  If  its  fair  market  price  or  value  as  of  March  1,  1913,  is  lower 
than  such  basis,  the  deductible  loss  is  the  excess  of  the  fair  market  price 
or  value  as  of  March  1,  1913,  over  the  amount  realized  therefor ;  and 

(3)  If  the  amount  realized  therefor  is  more  than  such  basis  but  not 
more  than  its  fair  market  price  or  value  as  of  March  1,  1913,  or  less  than 
such  basis  but  not  less  than  such  fair  market  price  or  value,  no  gain  shall 
be  included  in  and  no  loss  deducted  from  the  gross  income. 

(c)  For  the  purposes  of  this  title,  on  an  exchange  of  property,  real, 
personal  or  mixed,  for  any  other  such  property,  no  gain  or  loss  shall  be 
recognized  unless  the  property  received  in  exchange  has  a  readily  re- 
alizable market  value ;  but  even  if  the  property  received  in  exchange  has 
a  readily  realizable  market  value,  no  gain  or  loss  shall  be  recognized — 

(1)  When  any  such  property  held  for  investment,  or  for  productive 
use  in  trade  or  business  (not  including  stock-in-trade  or  other  property 
held  primarily  for  sale),  is  exchanged  for  property  of  a  like  kind  or 
use; 

(2)  When  in  the  reorganization  of  one  or  more  corporations  a  per- 
son receives  in  place  of  any  stock  or  securities  owned  by  him,  stock  or 
securities  in  a  corporation  a  party  to  or  resulting  from  such  reorgani- 
zation. The  word  "reorganization,"  as  used  in  this  paragraph,  includes 
a  merger  or  consolidation  (including  the  acquisition  by  one  corporation 
of  at  least  a  majority  of  the  voting  stock  and  at  least  a  majority  of  the 
total  number  of  shares  of  all  other  classes  of  stock  of  another  corpora- 
tion, or  of  substantially  all  the  properties  of  another  corporation),  re- 
capitalization, or  mere  change  in  identity,  form,  or  place  of  organization 
of  a  corporation,   (however  effected)  ;  or 

(3)  When  (a)  a  person  transfers  any  property,  real,  personal  or 
mixed,  to  a  corporation,  and  immediately  after  the  transfer  is  in  control 
of  such  corporation,  or  (b)  two  or  more  persons  transfer  any  such 
property  to  a  corporation,  and  immediately  after  the  transfer  are  in 
control  of  such  corporation,  and  the  amounts  of  stock,  securities,  or  both, 
received  by  such  persons  are  in  substantially  the  same  proportion  as  their 
interests  in  the  property  before  such  transfer.  For  the  purposes  of  this 
paragraph,  a  person  is,  or  two  or  more  persons  are,  "in  control"  of  a 
corporation  when  owning  at  least  80  per  centum  of  the  voting  stock  and  at 
least  80  per  centum  of  the  total  number  of  shares  of  all  other  classes  of 
stock  of  the  corporation. 

(d)  (1)  Where  property  is  exchanged  for  other  property  and  no 
gain  or  loss  is  recognized  under  the  provisions  of  subdivision  (c),  the 
property  received  shall,  for  the  purposes  of  this  section,  be  treated  as 
taking  fhe  place  of  the  property  exchanged  therefor,  except  as  provided 
in  subdivision    (e)  ; 

(2)  Where  property  is  compulsorily  or  involuntarily  converted  into 
cash  or  its  equivalent  in  the  manner  described  in  paragraph  (12)  of  sub- 
division   (a)    of   section  214  and  paragraph    (14)    of   subdivision    (a)    of 

100 


section  234,  and  the  taxpayer  proceeds  in  good  faith  to  expend  or  set 
aside  the  proceeds  of  such  conversion  in  the  form  and  in  the  manner 
therein  provided,  the  property  acquired  shall,  for  the  purpose  of  this 
section,  be  treated  as  taking  the  place  of  a  like  proportion  of  the  property 
converted ; 

(3)  Where  no  deduction  is  allowed  for  a  loss  or  a  part  thereof  under 
the  provisions  of  paragraph  (5)  of  subdivision  (a)  of  section  214  and 
paragraph  (4)  of  subdivision  (a)  of  section  234,  that  part  of  the  property 
acquired  with  relation  to  which  such  loss  is  disallowed  shall  for  the 
purposes  of  this  section  be  treated  as  taking  the  place  of  the  property  sold 
or  disposed  of. 

(e)  Where  property  is  exchanged  for  other  property  which  has  no 
readily  realizable  market  value,  together  with  money  or  other  property 
which  has  a  readily  realizable  market  value,  then  the  money  or  the  fair 
market  value  of  the  property  having  such  readily  realizable  market  value 
received  in  exchange  shall  be  applied  against  and  reduce  the  basis,  pro- 
vided in  this  section,  of  the  property  exchanged,  and  if  in  excess  of  such 
basis,  shall  be  taxable  to  the  extent  of  the  excess ;  but  when  property  is 
exchanged  for  property  specified  in  paragraphs  (1),  (2),  and  (3)  of  sub- 
division (c)  as  received  in  exchange,  together  with  money  or  other  prop- 
erty of  a  readily  realizable  market  value  other  than  that  specified  in  such 
paragraphs,  the  money  or  the  fair  market  value  of  such  other  property 
received  in  exchange  shall  be  applied  against  and  reduce  the  basis,  pro- 
vided in  this  section,  of  the  property  exchanged,  and  if  in  excess  of  such 
basis,  shall  be  taxable  to  the  extent  of  the  excess. 

(f)  Nothing  in  this  section  shall  be  construed  to  prevent  (in  the 
case  of  property  sold  under  contract  providing  for  payment  in  install- 
ments) the  taxation  of  that  portion  of  any  installment  payment  repre- 
senting gain  or  profit  in  the  year  in  which  such  payment  is  received. 

Inventories. 

Sec.  203.  That  whenever  in  the  opinion  of  the  Commissioner  the 
use  of  inventories  is  necessary  in  order  clearly  to  determine  the  income 
of  any  taxpayer,  inventories  shall  be  taken  by  such  taxpayer  upon  such 
basis  as  the  Commissioner,  with  the  approval  of  the  Secretary,  may  pre- 
scribe as  conforming  as  nearly  as  may  be  to  the  best  accounting  practice 
in  the  trade  or  business  and  as  most  clearly  reflecting  the  income. 

Net  Losses. 

Sec.  204.  (a)  That  as  used  in  this  section  the  term  "net  loss"  means 
onlv  net  losses  resulting  from  the  operation  of  any  trade  or  business 
regularly  carried  on  by  the  taxpayer  (including  losses  sustained  from  the 
sale  or  other  disposition  of  real  estate,  machinery,  and  other  capital  assets, 
used  in  the  conduct  of  such  trade  or  business)  ;  and  when  so  resulting 
means  the  excess  of  the  deductions  allowed  by  section  214  or  234,  as  the 
case  may  be,  over  the  sum  of  the  following:  (1)  the  gross  income  of  the 
taxpayer  for  the  taxable  year,  (2)  the  amount  by  which  the  interest  re- 
ceived free  from  taxation  under  this  title  exceeds  so  much  of  the  interest 
paid  or  accrued  within  the  taxable  year  on  indebtedness  as  is  not  per- 
mitted to  be  deducted  by  paragraph  (2)  of  subdivision  (a)  of  section  214 
or  by  paragraph  (2)  of  subdivision  (a)  of  section  234,  (3)  the  amount 
by  which  the  deductible  losses  not  sustained  in  such  trade  or  business  ex- 
ceed the  taxable  gains  or  profits  not  derived  from  such  trade  or  business, 
(4)  amounts  received  as  dividends  and  allowed  as  a  deduction  under 
paragraph  (6)  of  subdivision  (a)  of  section  234,  and  (5)  so  much  of  the 
depletion  deduction  allowed  with  respect  to  any  mine,  oil  or  gas  well  as  is 
based  upon  discovery  value  in  lieu  of  cost. 

101 


(b)  If  for  any  taxable  year  beginning  after  December  31,  1920,  it 
appears  upon  the  production  of  evidence  satisfactory  to  the  Commissioner 
that  any  taxpayer  has  sustained  a  net  loss,  the  amount  thereof  shall  be 
deducted  from  the  net  income  of  the  taxpayer  for  the  succeeding  taxable 
year;  and  if  such  net  loss  is  in  excess  of  the  net  income  for  such  succeed- 
ing taxable  year,  the  amount  of  such  excess  shall  be  allowed  as  a  deduc- 
tion in  computing  the  net  income  for  the  next  succeeding  taxable  year ; 
the  deduction  in  all  cases  to  be  made  under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 

(c)  The  benefit  of  this  section  shall  be  allowed  to  the  members  of  a 
partnership  and  the  beneficiaries  of  an  estate  or  trust,  and  to  insurance 
companies  subject  to  the  tax  imposed  by  section  243  or  246,  under  regula- 
tions prescribed  by  the  Commissioner  with  the  approval  of  the  Secretary. 

(d)  If  it  appears,  upon  the  production  of  evidence  satisfactory  to 
the  Commissioner,  that  a  taxpayer  having  a  fiscal  year  beginning  in  1920 
and  ending  in  1921  has  sustained  a  net  loss  during  such  fiscal  year,  such 
taxpayer  shall  be  entitled  to  the  benefits  of  this  section  in  respect  to  the 
same  proportion  of  such  net  loss  which  the  portion  of  such  fiscal  year 
falling  within  the  calendar  year  1921  is  of  the  entire  fiscal  year. 

Fiscal    Years    1920-1921    and    1921-1922. 

Sec.  205.  (a)  That  if  a  taxpayer  makes  return  for  a  fiscal  year  be- 
ginning in  1920  and  ending  in  1921,  his  tax  under  this  title  for  the  taxable 
year  1921  shall  be  the  sum  of:  (1)  the  same  proportion  of  a  tax  for  the 
entire  period  computed  under  Title  II  of  the  Revenue  Act  of  1918  at  the 
rates  for  the  calendar  year  1920  which  the  portion  of  such  period  falling 
within  the  calendar  year  1920  is  of  the  entire  period,  and  (2)  the  same 
proportion  of  a  tax  for  the  entire  period  computed  under  this  title  at 
the  rates  for  the  calendar  year  1921,  which  the  portion  of  such  period 
falling  within  the  calendar  year  1921   is  of  the  entire  period. 

Any  amount  paid  before  or  after  the  passage  of  this  Act  on  account 
of  the  tax  imposed  for  such  fiscal  year  by  Title  II  of  the  Revenue  Act  of 
1918  shall  be  credited  toward  the  payment  of  the  tax  imposed  for  such 
fiscal  year  by  this  Act,  and  if  the  amount  so  paid  exceeds  the  amount  of 
such  tax  imposed  by  this  Act,  the  excess  shall  be  credited  or  refunded  in 
accordance  with  the  provisions  of  section  252. 

(b)  If  a  taxpayer  makes  return  for  a  fiscal  year  beginning  in  1921  and 
ending  in  1922,  his  tax  under  this  title  for  the  taxable  year  1922  shall  be 
the  sum  of:  (1)  the  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  this  title  (as  in  force  on  December  31,  1921)  at  the  rates 
for  the  calendar  year  1921  which  the  portion  of  such  period  falling  within 
the  calendar  year  1921  is  of  the  entire  period,  and  (2)  the  same  propor- 
tion of  a  tax  for  the  entire  period  computed  under  this  title  (as  in  force 
on  January  1.  1922)  at  the  rates  for  the  calendar  year  1922  which  the 
portion  of  such  period  falling  within  the  calendar  year  1922  is  of  the 
entire  period:  Provided,  That  in  the  case  of  a  personal  service  corpora- 
tion the  amount  to  be  paid  shall  be  only  that  specified  in  clause  (2). 

(c)  If  a  fiscal  year  of  a  partnership  begins  in  1920  and  ends  in  1921, 
or  begins  in  1921  and  ends  in  1922.  then  (1)  the  rates  for  the  calendar 
year  during  which  such  fiscal  year  begins  shall  apply  to  an  amount  of 
each  partner's  share  of  such  partnership  net  income  (determined  under 
the  law  applicable  to  such  year)  equal  to  the  proportion  which  the  part 
of  such  fiscal  year  falling  within  such  calendar  year  bears  to  the  full 
fiscal  year,  and  (2)  the  rates  for  the  calendar  year  during  which  such 
fiscal  year  ends  shall  apply  to  an  amount  of  each  partner's  share  of  such 
partnership  net  income  (determined  under  the  law  applicable  to  such 
calendar  year)  equal  to  the  proportion  which  the  part  of  such  fiscal  year 
falling  within  such  calendar  year  bears  to  the  full  fiscal  year. 

102 


Capital    Gain. 

Sec.  206.     (a)  That  for  the  purpose  of  this  title: 

(1)  The  term  "capital  gain"  means  taxable  gain  from  the  sale  or  ex- 
change of  capital  assets  consummated  after  December  31,  1921 ; 

(2)  The  term  "capital  loss"  means  deductible  loss  resulting  from  the 
sale  or  exchange  of  capital  assets  consummated  after  December  31,  1921 ; 

(3)  The  term  "capital  deductions"  means  such  deductions  as  are 
allowed  under  this  title  for  the  purpose  of  computing  net  income  and  are 
properly  allocable  to  or  chargeable  against  items  of  capital  gain  as  defined 
in  this  section ; 

(4)  The  term  "capital  net  gain"  means  the  excess  of  the  total  amount 
of  capital  gain  over  the  sum  of  the  capital  deductions  and  capital  losses ; 

(5)  The  term  "ordinary  net  income"  means  the  net  income,  computed 
in  accordance  with  the  provisions  of  this  title,  after  excluding  all  items  of 
capital  gain,  capital  loss,  and  capital  deductions ;  and 

(6)  The  term  "capital  assets"  as  used  in  this  section  means  property 
acquired  and  held  by  the  taxpayer  for  profit  or  investment  for  more  than 
two  years  (whether  or  not  connected  with  his  trade  or  business),  but  does 
not  include  property  held  for  the  personal  use  or  consumption  of  the 
taxpayer  or  his  family,  or  stock  in  trade  of  the  taxpayer  or  other  property 
of  a  kind  which  would  properly  be  included  in  the  inventory  of  the  tax- 
payer if  on  hand  at  the  close  of  the  taxable  year. 

(b)  In  the  case  of  any  taxpayer  (other  than  a  corporation)  who  for 
any  taxable  year  derives  a  capital  net  gain,  there  shall  (at  the  election  of 
the  taxpayer)  be  levied,  collected  and  paid,  in  lieu  of  the  taxes  imposed 
by  sections  210  and  211  of  this  title,  a  tax  determined  as  follows: 

A  partial  tax  shall  first  be  computed  upon  the  basis  of  the  ordinary  net 
income  at  the  rates  and  in  the  manner  provided  in  sections  210  and  211, 
and  the  total  tax  shall  be  this  amount  plus  I2V2  per  centum  of  the  capital 
net  gain ;  but  if  the  taxpayer  elects  to  be  taxed  under  this  section  the 
total  tax  shall  in  no  such  case  be  less  than  12^/^  per  centum  of  the  total 
net  income.  The  total  tax  thus  determined  shall  be  computed,  collected 
and  paid  in  the  same  manner,  at  the  same  time  and  subject  to  the  same 
provisions  of  law,  including  penalties,  as  other  taxes  under  this  title. 

(c)  In  the  case  of  a  partnership  or  of  an  estate  or  trust,  the  proper 
part  of  each  share  of  the  net  income  which  consists,  respectively,  of 
ordinary  net  income  and  capital  net  gain,  shall  be  determined  under  rules 
and  regulations  to  be  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary,  and  shall  be  separately  shown  in  the  return  of  the 
partnership  or  estate  or  trust,  and  shall  be  taxed  to  the  member  or  bene- 
ficiary or  to  the  estate  or  trust  as  provided  in  sections  218  and  219,  but 
at  the  rates  and  in  the  manner  provided  in  subdivision  (b)  of  this  section. 

PART  II.— INDIVIDUALS. 

Normal  Tax. 

Sec.  210.  That,  in  lieu  of  the  tax  imposed  by  section  210  of  the 
Revenue  Act  of  1918,  there  shall  be  levied,  collected,  and  paid  for  each 
taxable  year  upon  the  net  income  of  every  individual  a  normal  tax  of  8 
per  centum  of  the  amount  of  the  net  income  in  excess  of  the  credits  pro- 
vided in  section  216;  Provided,  That  in  the  case  of  a  citizen  or  resident 
of  the  United  States  the  rate  upon  the  first  $4,000  of  such  excess  amount 
shall  be  4  per  centum. 

Surtax. 

Sec.  211.  (a)  That,  in  lieu  of  the  tax  imposed  by  section  211  of  the 
Revenue  Act  of  1918,  but  in  addition  to  the  normal  tax  imposed  by  section 

103 


210  of  this  Act,  there  shall  be  levied,  collected,  and  paid  for  each  taxable 
year  upon  the  net  income  of  every  individual — 

(1)   For  the    calendar  year    1921,   a  surtax  equal   to    the  sum  of   the 
following : 

1  per  centum  of  the  amount  by  which  the  net  income  exceeds  $5,000 
and  does  not  exceed  $6,000; 

2  per  centum  of  the  amount  by  which  the  net  income  exceeds  $6,000 
and  does  not  exceed  $8,000; 

3  per  centum  of  the  amount  by  which  the  net  income  exceeds  $8,000 
and  does  not  exceed  $10,000; 

4  per  centum  of  the  amount  by  which  the  net  income  exceeds  $10,000 
and  does  not  exceed  $12,000; 

5  per  centum  of  the  amount  by  which  the  net  income  exceeds  $12,000 
and  does  not  exceed  $14,000 ; 

6  per  centum  of  the  amount  by  which  the  net  income  exceeds  $14,000 
and  does  not  exceed  $16,000; 

7  per  centum  of  the  amount  by  which  the  net  income  exceeds  $16,000 
and  does  not  exceed  $18,000 ; 

8  per  centum  of  the  amount  by  which  the  net  income  exceeds  $18,000 
and  does  not  exceed  $20,000; 

9  per  centum  of  the  amount  by  which  the  net  income  exceeds  $20,000 
and  does  not  exceed  $22,000; 

10  per  centum  of  the  amount  by  which  the  net  income  exceeds  $22,000 
and  does  not  exceed  $24,000; 

11  per  centum  of  the  amount  by  which  the  net  income  exceeds  $24,000 
and  does  not  exceed  $26,000 ; 

12  per  centum  of  the  amount  by  which  the  net  income  exceeds  $26,000 
and  does  not  exceed  $28,000; 

13  per  centum  of  the  amount  by  which  the  net  income  exceeds  $28,000 
and  does  not  exceed  $30,000; 

14  per  centum  of  the  amount  by  which  the  net  income  exceeds  $30,000 
and  does  not  exceed  $32,000; 

15  per  centum  of  the  amount  by  which  the  net  income  exceeds  $32,000 
and  does  not  exceed  $34,000 ; 

16  per  centum  of  the  amount  by  which  the  net  income  exceeds  $34,000 
and  does  not  exceed  $36,000; 

17  per  centum  of  the  amount  by  which  the  net  income  exceeds  $36,000 
and  does  not  exceed  $38,000 ; 

18  per  centum  of  the  amount  by  which  the  net  income  exceeds  $38,000 
and  does  not  exceed  $40,000 ; 

19  per  centum  of  the  amount  by  which  the  net  income  exceeds  $40,000 
and  does  not  exceed  $42,000 ; 

20  per  centum  of  the  amount  by  which  the  net  income  exceeds  $42,000 
and  does  not  exceed  $44,000; 

21  per  centum  of  the  amount  by  which  the  net  income  exceeds  $44,000 
and  does  not  exceed  $46,000 ; 

22  per  centum  of  the  amount  by  which  the  net  income  exceeds  $46,000 
and  does  not  exceed  $48,000; 

23  per  centum  of  the  amount  by  which  the  net  income  exceeds  $48,000 
and  does  not  exceed  $50,000; 

24  per  centum  of  the  amount  by  which  the  net  income  exceeds  $50,000 
and  does  not  exceed  $52,000 ; 

25  per  centum  of  the  amount  by  which  the  net  income  exceeds  $52,000 
and  does  not  exceed  $54,000 ; 

26  per  centum  of  the  amount  by  which  the  net  income  exceeds  $54,000 
and  does  not  exceed  $56,000; 

27  per  centum  of  the  amount  by  which  the  net  income  exceeds  $56,000 
and  does  not  exceed  $58,000;  e-eonnn 

28  per  centum  of  the  amount  by  which  the  net  income  exceeds  $58,000 
and  does  not  exceed  $60,000; 

104 


29  per  centum  of  the  amount  by  which  the  net  income  exceeds  $60,000 
and  does  not  exceed  $62,000; 

30  per  centum  of  the  amount  by  which  the  net  income  exceeds  $62,000 
and  does  not  exceed  $64,000 ; 

31  per  centum  of  the  amount  by  which  the  net  income  exceeds  $64,000 
and  does  not  exceed  $66,000; 

32  per  centum  of  the  amount  by  which  the  net  income  exceeds  $66,000 
and  does  not  exceed  $68,000; 

33  per  centum  of  the  amount  by  which  the  net  income  exceeds  $68,000 
and  does  not  exceed  $70,000 ; 

34  per  centum  of  the  amount  by  which  the  net  income  exceeds  $70,000 
and  does  not  exceed  $72,000; 

35  per  centum  of  the  amount  by  which  the  net  income  exceeds  $72,000 
and  does  not  exceed  $74,000; 

36  per  centum  of  the  amount  by  which  the  net  income  exceeds  $74,000 
and  does  not  exceed  $76,000 ; 

37  per  centum  of  the  amount  by  which  the  net  income  exceeds  $76,000 
and  does  not  exceed  $78,000; 

38  per  centum  of  the  amount  by  which  the  net  income  exceeds  $78,000 
and  does  not  exceed  $80,000; 

39  per  centum  of  the  amount  by  which  the  net  income  exceeds  $80,000 
and  does  not  exceed  $82,000; 

40  per  centum  of  the  amount  by  which  the  net  income  exceeds  $82,000 
and  does  not  exceed  $84,000; 

41  per  centum  of  the  amount  by  which  the  net  income  exceeds  $84,000 
and  does  not  exceed  $86,000; 

42  per  centum  of  the  amount  by  which  the  net  income  exceeds  $86,000 
and  does  not  exceed  $88,000; 

43  per  centum  of  the  amount  by  which  the  net  income  exceeds  $88,000 
and  does  not  exceed  $90,000; 

44  per  centum  of  the  amount  by  which  the  net  income  exceeds  $90,000 
and  does  not  exceed  $92,000 ; 

45  per  centum  of  the  amount  by  which  the  net  income  exceeds  $92,000 
and  does  not  exceed  $94,000; 

46  per  centum  of  the  amount  by  which  the  net  income  exceeds  $94,000 
and  does  not  exceed  $96,000; 

47  per  centum  of  the  amount  by  which  the  net  income  exceeds  $96,000 
and  does  not  exceed  $98,000; 

48  per  centum  of  the  amount  by  which  the  net  income  exceeds  $98,000 
and  does  not  exceed  $100,000; 

52  per  centum  of  the  amount  by  which  the  net  income  exceeds  $100,000 
and  does  not  exceed  $150,000; 

56  per  centum  of  the  amount  by  which  the  net  income  exceeds  $150,000 
and  does  not  exceed  $200,000; 

60  per  centum  of  the  amount  by  which  the  net  income  exceeds  $200,000 
and  does  not  exceed  $300,000; 

63  per  centum  of  the  amount  by  which  the  net  income  exceeds  $300,000 
and  does  not  exceed  $500,000; 

64  per  centum  of  the  amount  by  which  the  net  income  exceeds  $500,000 
and  does  not  exceed  $1,000,000; 

65  per  centum  of  the  amount  by  which  the  net  income  exceeds  $1,000,- 
000; 

(2)  For  the  calendar  year  1922  and  each  calendar  year  thereafter, 
a  surtax  equal  to  the  sum  of  the  following: 

1  per  centum  of  the  amount  by  which  the  net  income  exceeds  $6,000 
and  does  not  exceed  $10,000; 

2  per  centum  of  the  amount  by  which  the  net  income  exceeds  $10,000 
and  does  not  exceed  $12,000; 

3  per  centum  of  the  amount  by  which  the  net  income  exceeds  $12,000 
and  does  not  exceed  $14,000; 

105 


4  per  centum  of  the  amount  by  which  the  net  income  exceeds  $14,000 
and  does  not  exceed  $16,000; 

5  per  centum  of  the  amount  by  which  the  net  income  exceeds  $16,000 
and  does  not  exceed  $18,000; 

6  per  centum  of  the  amount  by  which  the  net  income  exceeds  $18,000 
and  does  not  exceed  $20,000; 

8  per  centum  of  the  amount  by  which  the  net  income  exceeds  $20,000 
and  does  not  exceed  $22,000; 

9  per  centum  of  the  amount  by  which  the  net  income  exceeds  $22,000 
and  does  not  exceed  $24,000; 

10  per  centum  of  the  amount  by  which  the  net  income  exceeds  $24,000 
and  does  not  exceed  $26,000 ; 

11  per  centum  of  the  amount  by  which  the  net  income  exceeds  $26,000 
and  does  not  exceed  $28,000; 

12  per  centum  of  the  amount  by  which  the  net  income  exceeds  $28,000 
and  does  not  exceed  $30,000; 

13  per  centum  of  the  amount  by  which  the  net  income  exceeds  $30,000 
and  does  not  exceed  $32,000; 

15  per  centum  of  the  amount  by  which  the  net  income  exceeds  $32,000 
and  does  not  exceed  $36,000; 

16  per  centum  of  the  amount  by  which  the  net  income  exceeds  $36,000 
and  does  not  exceed  $38,000; 

17  per  centum  of  the  amount  by  which  the  net  income  exceeds  $38,000 
and  does  not  exceed  $40,000 ; 

18  per  centum  of  the  amount  by  which  the  net  income  exceeds  $40,000 
and  does  not  exceed  $42,000 ; 

19  per  centum  of  the  amount  by  which  the  net  income  exceeds  $42,000 
and  does  not  exceed  $44,000; 

20  per  centum  of  the  amount  by  which  the  net  income  exceeds  $44,000 
and  does  not  exceed  $46,000; 

21  per  centum  of  the  amount  by  which  the  net  income  exceeds  $46,000 
and  does  not  exceed  $48,000; 

22  per  centum  of  the  amount  by  which  the  net  income  exceeds  $48,000 
and  does  not  exceed  $50,000 ; 

23  per  centum  of  the  amount  by  which  the  net  income  exceeds  $50,000 
and  does  not  exceed  $52,000; 

24  per  centum  of  the  amount  by  which  the  net  income  exceeds  $52,000 
and  does  not  exceed  $54,000 ; 

25  per  centum  of  the  amount  by  which  the  net  income  exceeds  $54,000 
and  does  not  exceed  $56,000; 

26  per  centum  of  the  amount  by  which  the  net  income  exceeds  $56,000 
and  does  not  exceed  $58,000 ; 

27  per  centum  of  the  amount  by  which  the  net  income  exceeds  $58,000 
and  does  not  exceed  $60,000 ; 

28  per  centum  of  the  amount  by  which  the  net  income  exceeds  $60,000 
and  does  not  exceed  $62,000; 

29  per  centum  of  the  amount  by  which  the  net  income  exceeds  $62,000 
and  does  not  exceed  $64,000 ; 

30  per  centum  of  the  amount  by  which  the  net  income  exceeds  $64,000 
and  does  not  exceed  $66,000; 

31  per  centum  of  the  amount  by  which  the  net  income  exceeds  $66,000 
and  does  not  exceed  $68,000 ; 

32  per  centum  of  the  amount  by  which  the  net  income  exceeds  $68,000 
and  does  not  exceed  $70,000; 

33  per  centum  of  the  amount  by  which  the  net  income  exceeds  $70,000 
and  does  not  exceed  $72,000; 

34  per  centum  of  the  amount  by  which  the  net  income  exceeds  $72,000 
and  docs  not  exceed  $74,000; 

35  per  centum  of  the  amount  by  which  the  net  income  exceeds  $74,000 
and  does  not  exceed  $76,000; 

36  per  centum  of  the  amount  by  which  the  net  income  exceeds  $76,000 
and  does  not  exceed  $78,000; 

106 


37  per  centum  of  the  amount  by  which  the  net  income  exceeds  $78,000 
and  does  not  exceed  $80,000; 

38  per  centum  of  the  amount  by  which  the  net  income  exceeds  $80,000 
and  does  not  exceed  $82,000 ; 

39  per  centum  of  the  amount  by  which  the  net  income  exceeds  $82,000 
and  does  not  exceed  $84,000 ; 

40  per  centum  of  the  amount  by  which  the  net  income  exceeds  $84,000 
and  does  not  exceed  $86,000 ; 

41  per  centum  of  the  amount  by  which  the  net  income  exceeds  $86,000 
and  does  not  exceed  $88,000; 

42  per  centum  of  the  amount  by  which  the  net  income  exceeds  $88,000 
and  does  not  exceed  $90,000 ; 

43  per  centum  of  the  amount  by  which  the  net  income  exceeds  $90,000 
and  does  not  exceed  $92,000; 

44  per  centum  of  the  amount  by  which  the  net  income  exceeds  $92,000 
and  does  not  exceed  $94,000 ; 

45  per  centum  of  the  amount  by  which  the  net  income  exceeds  $94,000 
and  does  not  exceed  $96,000; 

46  per  centum  of  the  amount  by  which  the  net  income  exceeds  $96^000 
and  does  not  exceed  $98,000 ; 

47  per  centum  of  the  amount  by  which  the  net  income  exceeds  $98,000 
and  does  not  exceed  $100,000; 

48  per  centum  of  the  amount  by  which  the  net  income  exceeds  $100,000 
and  does  not  exceed  $150,000; 

49  per  centum  of  the  amount  by  which  the  net  income  exceeds  $150,000 
and  does  not  exceed  $200,000; 

50  per  centum  of  the  amount  by  which  the  net  income  exceeds  $200,000. 

(b)  In  the  case  of  a  bona  fide  sale  of  mines,  oil  or  gas  wells,  or  any 
interest  therein,  where  the  principal  value  of  the  property  has  been  demon- 
strated by  prospecting  or  exploration  and  discovery  work  done  by  the 
taxpayer,  the  portion  of  the  tax  imposed  by  this  section  attributable  to 
such  sale  shall  not  exceed,  for  the  calendar  year  1921,  20  per  centum,  and 
for  each  calendar  year  thereafter  16  per  centum,  of  the  selling  price  of 
such  property  or  interest. 

Net  Income  of  Individuals  Defined. 

Sec.  212.  (a)  That  in  the  case  of  an  individual  the  term  "net  in- 
come" means  the  gross  income  as  defined  in  section  213,  less  the  deduc- 
tions allowed  by  section  214. 

(b)  The  net  income  shall  be  computed  upon  the  basis  of  the  taxpayer's 
annual  accounting  period  (fiscal  year  or  calendar  year,  as  the  case  may 
be)  in  accordance  with  the  method  of  accounting  regularly  employed  in 
keeping  the  books  of  such  taxpayer;  but  if  no  such  method  of  accounting 
has  been  so  employed,  or  if  the  method  employed  does  not  clearly  reflect 
the  income,  the  computation  shall  be  made  upon  such  basis  and  in  such 
manner  as  in  the  opinion  of  the  Commissioner  does  clearly  reflect  the  in- 
come. If  the  taxpayer's  annual  accounting  period  is  other  than  a  fiscal 
year  as  defined  in  section  200  or  if  the  taxpayer  has  no  annual  account- 
ing period  or  does  not  keep  books,  the  net  income  shall  be  computed  on 
the  basis  of  the  calendar  year. 

(c)  If  a  taxpayer  changes  his  accounting  period  from  fiscal  year  to 
calendar  year,  from  calendar  year  to  fiscal  year,  or  from  one  fiscal  year 
to  another,  the  net  income  shall,  with  the  approval  of  the  Commissioner, 
be  computed  on  the  basis  of  such  new  accounting  period,  subject  to  the 
provisions  of  section  226. 

Gross  Income  Defined. 

Sec.  213.  That  for  the  purposes  of  this  title  (except  as  otherwise 
provided  in  section  233)  the  term  "gross  income" — 

107 


(a)  Includes  gains,  profits,  and  income  derived  from  salaries,  wages, 
or  compensation  for  personal  service  (including  in  the  case  of  the  Presi- 
dent of  the  United  States,  the  judges  of  the  Supreme  and  inferior  courts 
of  the  United  States,  and  all  other  officers  and  employees,  whether  elected 
or  appointed,  of  the  United  States,  Alaska,  Hawaii,  or  any  political  sub- 
division thereof,  or  the  District  of  Columbia,  the  compensation  received 
as  such),  of  whatever  kind  and  in  whatever  form  paid,  or  from  profes- 
sions, vocations,  trades,  businesses,  commerce,  or  sales,  or  dealings  in 
property,  whether  real  or  personal,  growing  out  of  the  ownership  or  use 
of  or  interest  in  such  property ;  also  from  interest,  rent,  dividends,  securi- 
ties, or  the  transaction  of  any  business  carried  on  for  gain  or  profit,  or 
gains  or  profits  and  income  derived  from  any  source  whatever.  The 
amount  of  all  such  items  (except  as  provided  in  subdivision  (e)  of  section 
201)  shall  be  included  in  the  gross  income  for  the  taxable  year  in  which 
received  by  the  taxpayer,  unless,  under  methods  of  accounting  permitted 
under  subdivision  (b)  of  section  212,  any  such  amounts  are  to  be  properly 
accounted  for  as  of  a  different  period ;  but 

(b)  Does  not  include  the  following  items,  which  shall  be  exempt 
from  taxation  under  this  title : 

(1)  The  proceeds  of  life  insurance  policies  paid  upon  the  death  of 
the  insured ; 

(2)  The  amount  received  by  the  insured  as  a  return  of  premium  or 
premiums  paid  by  him  under  life  insurance,  endowment,  or  annuity  con- 
tracts, either  during  the  term  or  at  the  maturity  of  the  term  mentioned 
in  the  contract  or  upon  surrender  of  the  contract ; 

(3)  The  value  of  property  acquired  by  gift,  bequest,  devise,  or  descent 
(but  the  income  from  such  property  shall  be  included  in  gross  income)  ; 

(4)  Interest  upon  (a)  the  obligations  of  a  State,  Territory,  or  any 
political  subdivision  thereof,  or  the  District  of  Columbia;  or  (b)  securi- 
ties issued  under  the  provisions  of  the  Federal  Farm  Loan  Act  of  Juiy 
17,  1916;  or  (c)  the  obligations  of  the  United  States  or  its  possessions; 
or  (d)  bonds  issued  by  the  War  Finance  Corporation.  In  the  case  of 
obligations  of  the  United  States  issued  after  September  1,  1917  (other 
than  postal  savings  certificates  of  deposit),  and  in  the  case  of  bonds  issued 
by  the  War  Finance  Corporation,  the  interest  shall  be  exempt  only  if  and 
to  the  extent  provided  in  the  respective  Acts  authorizing  the  issue  thereof 
as  amended  and  supplemented,  and  shall  be  excluded  from  gross  income 
only  if  and  to  the  extent  it  is  wholly  exempt  to  the  taxpayer  from  in- 
come, war-profits  and  excess-profits  taxes ; 

(5)  The  income  of  foreign  governments  received  from  investments 
in  the  United  States  in  stocks,  bonds,  or  other  domestic  securities,  owned 
by  such  foreign  governments,  or  from  interest  on  deposits  in  banks  in  the 
United  States  of  moneys  belonging  to  such  foreign  governments,  or  from 
any  other  source  within  the  United  States  ; 

(6)  Amounts  received,  through  accident  or  health  insurance  or  under 
workmen's  compensation  acts,  as  compensation  for  personal  injuries  or 
sickness,  plus  the  amount  of  any  damages  received  whether  by  suit  or 
agreement  on  account  of  such  injuries  or  sickness; 

(7)  Income  derived  from  any  public  utility  or  the  exercise  of  any 
essential  governmental  function  and  accruing  to  any  State,  Territory,  or 
the  District  of  Columbia,  or  any  political  subdivision  of  a  State  or  Terri- 
tory, or  income  accruing  to  the  Government  of  any  possession  of  the 
United  States,  or  any  political  subdivision  thereof. 

Whenever  any  State,  Territory,  or  the  District  of  Columbia,  or  any 
political  subdivision  of  a  State  or  Territory,  prior  to  September  8,  1916, 
entered  in  good  faith  into  a  contract  with  any  person,  the  object  and  pur- 
pose of  which  is  to  acquire,  construct,  operate,  or  maintain  a  public  utility, 
no  tax  shall  be  levied  under  the  provisions  of  this  title  upon  the  income 
derived  from  the  operation  of  such  public  utility,  so  far  as  the  payment 

108 


thereof  will  impose  a  loss  or  burden  upon  such  State,  Territory,  District 
of  Columbia,  or  political  subdivision;  but  this  provision  is  not  intended 
and  shall  not  be  construed  to  confer  upon  such  person  any  financial  gain 
or  exemption  or  to  relieve  such  person  from  the  payment  of  a  tax  as  pro- 
vided for  in  this  title  upon  the  part  or  portion  of  such  income  to  which 
such  person  is  entitled  under  such  contract ; 

(8)  The  income  of  a  nonresident  alien  or  foreign  corporation  which 
consists  exclusively  of  earnings  derived  from  the  operation  of  a  ship  or 
ships,  documented  under  the  laws  of  a  foreign  country  which  grants  an 
equivalent  exemption  to  citizens  of  the  United  States  and  to  corporations 
organized  in  the  United  States; 

(9)  Amounts  received  as  compensation,  family  allotments  and  allow- 
ances under  the  provisions  of  the  War  Risk  Insurance  and  the  Vocational 
Rehabilitation  Acts,  or  as  pensions  from  the  United  States  for  service 
of  -the  beneficiary  or  another  in  the  military  or  naval  forces  of  the  United 
States  in  time  of  war ; 

(10)  So  much  of  the  amount  received  by  an  individual  after  Decem- 
ber 31,  1921,  and  before  January  1,  1927,  as  dividends  or  interest  from 
domestic  building  and  loan  associations,  operated  exclusively  for  the  pur- 
pose of  making  loans  to  members,  as  does  not  exceed  $300; 

(11)  The  rental  value  of  a  dwelling  house  and  appurtenances  thereof 
furnished  to  a  minister  of  the  gospel  as  part  of  his  compensation. 

(12)  The  receipts  of  shipowners'  mutual  protection  and  indemnity 
associations,  not  organized  for  profit,  and  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  member,  but 
such  corporations  shall  be  subject  as  other  persons  to  the  tax  upon  their 
net  income  from  interest,  dividends,  and  rents. 

(c)  In  the  case  of  a  nonresident  alien  individual,  gross  income  means 
only  the  gross  income  from  sources  within  the  United  States,  determined 
under  the  provisions  of  section  217. 

Deductions  Allowed   Individuals. 

Sec.  214.  (a)  That  in  computing  net  income  there  shall  be  allowed 
as  deductions : 

(1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  during 
the  taxable  year  in  carrying  on  any  trade  or  business,  including  a  reason- 
able allowance  for  salaries  or  other  compensation  for  personal  services 
actually  rendered;  traveling  expenses  (including  the  entire  amount  ex- 
pended for  meals  and  lodging)  while  away  from  home  in  the  pursuit  of 
a  trade  or  business ;  and  rentals  or  other  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  possession,  for  purposes  of  the 
trade  or  business,  of  property  to  which  the  taxpayer  has  not  taken  or  is 
not  taking  title  or  in  which  he  has  no  equity ; 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  indebt- 
edness, except  on  indebtedness  incurred  or  continued  to  purchase  or  carry 
obligations  or  securities  (other  than  obligations  of  the  United  States  issued 
after  September  24,  1917,  and  originally  subscribed  for  by  the  taxpayer) 
the  interest  upon  which  is  wholly  exempt  from  taxation  under  this  title ; 

(3)  Taxes  paid  or  accrued  within  the  taxable  year  except  (a)  income, 
war-profits,  and  excess-profits  taxes  imposed  by  the  authority  of  the 
United  States,  (b)  so  much  of  the  income,  war-profits  and  excess-profits 
taxes,  imposed  by  the  authority  of  any  foreign  country  or  possession  of 
the  United  States,  as  is  allowed  as  a  credit  under  section  222,  (c)  taxes 
assessed  against  local  benefits  of  a  kind  tending  to  increase  the  value  of 
the  property  assessed,  and  (d)  taxes  imposed  upon  the  taxpayer  upon 
his  interest  as  shareholder  or  member  of  a  corporation,  which  are  paid 
by  the  corporation  without  reimbursement  from  the  taxpayer.  For  the 
purpose  of  this  paragraph  estate,  inheritance,  legacy,  and  succession  taxes 

109 


accrue  on  the  due  date  thereof  except  as  otherwise  provided  by  the  law 
of  the  jurisdiction  imposing  such  taxes ; 

(4)  Losses  sustained  during  the  taxable  year  and  not  compensated  for 
by  insurance  or  otherwise,  if  incurred  in  trade  or  business ; 

(5)  Losses  sustained  during  the  taxable  year  and  not  compensated 
for  by  insurance  or  otherwise,  if  incurred  in  any  transaction  entered  into 
for  profit,  though  not  connected  with  the  trade  or  business ;  but  in  the 
case  of  a  nonresident  alien  individual  only  if  and  to  the  extent  that  the 
profit,  if  such  transaction  had  resulted  in  a  profit,  would  be  taxable  under 
this  title.  No  deduction  shall  be  allowed  under  this  paragraph  for  any 
loss  claimed  to  have  been  sustained  in  any  sale  or  other  disposition  of 
shares  of  stock  or  securities  made  after  the  passage  of  this  Act  where  it 
appears  that  within  thirty  days  before  or  after  the  date  of  such  sale  or 
other  disposition  the  taxpayer  has  acquired  (otherwise  than  by  bequest  or 
inheritance)  substantially  identical  property,  and  the  property  so  acquired 
is  held  by  the  taxpayer  for  any  period  after  such  sale  or  other  disposition. 
If  such  acquisition  is  to  the  extent  of  part  only  of  substantially  identical 
property,  then  only  a  proportionate  part  of  the  loss  shall  be  disallowed; 

(6)  Losses  sustained  during  the  taxable  year  of  property  not  con- 
nected with  the  trade  or  business  (but  in  the  case  of  a  nonresident  alien 
individual  only  property  within  the  United  States)  if  arising  from  fires, 
storms,  shipwreck,  or  other  casualty,  or  from  theft,  and  if  not  com- 
pensated for  by  insurance  or  otherwise.  Losses  allowed  under  paragraphs 
(4),  (5),  and  (6)  of  this  subdivision  shall  be  deducted  as  of  the  taxable 
year  in  which  sustained  unless,  in  order  to  clearly  reflect  the  income,  the 
loss  should,  in  the  opinion  of  the  Commissioner,  be  accounted  for  as  of  a 
different  period.  In  case  of  losses  arising  from  destruction  of  or  dam- 
age to  property,  where  the  property  so  destroyed  or  damaged  was  ac- 
quired before  March  1,  1913,  the  deduction  shall  be  computed  upon  the 
basis  of  its  fair  market  price  or  value  as  of  March  1,  1913; 

(7)  Debts  ascertained  to  be  worthless  and  charged  off  within  the 
taxable  year  (or.  in  the  discretion  of  the  Commissioner,  a  reasonable 
addition  to  a  reserve  for  bad  debts)  ;  and  when  satisfied  that  a  debt  is 
recoverable  only  in  part,  the  Commissioner  may  allow  such  debt  to  be 
charged  off  in  part; 

(8)  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of 
property  used  in  the  trade  or  business,  including  a  reasonable  allowance 
for  obsolescence.  In  the  case  of  such  property  acquired  before  March 
1,  1913,  this  deduction  shall  be  computed  upon  the  basis  of  its  fair  market 
price  or  value  as  of  March  1,  1913 ; 

(9)  In  the  case  of  buildings,  machinery,  equipment,  or  other  facilities, 
constructed,  erected,  installed,  or  acquired,  on  or  after  April  6,  1917,  for 
the  production  of  articles  contributing  to  the  prosecution  of  the  war 
against  the  German  Government,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or 
men  rontrihutine  to  the  prosecution  of  such  war.  there  shall  be  allowed, 
for  anv  taxable  year  ending  before  March  3,  1924  (if  claim  therefor  was 
made  at  the  time  of  filing  return  for  the  taxable  year  1918,  1919,  1920,  or 
1921)  a  reasonable  deduction  for  the  amortization  of  such  part  of  the  cost 
of  such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer,  but  not 
again  including  any  amount  otherwise  allowed  under  this  title  or  previous 
Acts  of  Congress  as  a  deduction  in  computing  net  income.  At  any  time 
before  March  3.  1924,  the  Commissioner  mav.  and  at  the  request  of  the 
taxpayer  shall,  re-examine  the  return,  and  if  he  then  finds  as  a  result 
of  an  appraisal  or  form  other  evidence  that  the  deduction  originally  al- 
lowed was  incorrect,  the  income,  war-profits,  and  excess-profits  taxes  for 
the  year  or  years  affected  shall  be  redetermined ;  and  the  amount  of  tax 
due  upon  such  redetermination,  if  any,  shall  be  paid  upon  notice  and  de- 
mand by  the  collector,  or  the  amount  of  tax  overpaid,  if  any,  shall  be 

110 


credited  or  refunded  to  the  taxpayer  in  accordance  with  the  provisions 
of  section  252; 

(10)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits, 
and  timber,  a  reasonable  allowance  for  depletion  and  for  depreciation  of 
improvements,  according  to  the  peculiar  conditions  in  each  case,  based 
upon  cost  including  cost  of  development  not  otherwise  deducted :  Pro- 
vided, That  in  the  case  of  such  properties  acquired  prior  to  March  1, 
1913,  the  fair  market  value  of  the  property  (or  the  taxpayer's  interest 
therein)  on  that  date  shall  be  taken  in  lieu  of  cost  up  to  that  date:  Pro- 
vided further,  That  in  the  case  of  mines,  oil  and  gas  wells,  discovered  by 
the  taxpayer,  on  or  after  March  1.  1913.  and  not  acquired  as  the  result  of 
purchase  of  a  proven  tract  or  lease,  where  the  fair  market  value  of  the 
property  is  materially  disproportionate  to  the  cost,  the  depletion  allowance 
shall  be  based  upon  the  fair  market  value  of  the  property  at  the  date  of 
the  discovery,  or  within  thirty  days  thereafter:  And  provided  further. 
That  such  depletion  allowance  based  on  discovery  value  shall  not  exceed 
the  net  income,  computed  without  allowance  for  depletion,  from  the  prop- 
erty upon  which  the  discovery  is  made,  except  where  such  net  income  so 
comQuted  is  less  than  the  depletion  allowance  based  on  cost  or  fair  market 
value  as  of  March  1,  1913 ;  such  reasonable  allowance  in  all  the  above 
cases  to  be  made  under  rules  and  regulations  to  be  prescribed  by  the 
Commissioner,  with  the  approval  of  the  Secretary.  In  the  case  of  leases 
the  deductions  allowed  by  this  paragraph  shall  be  equitably  apportioned 
between  the  lessor  and  lessee ; 

(11)  Contributions  or  gifts  made  within  the  taxable  year  to  or  for 
the  use  of:  (a)  The  United  States,  any  State,  Territory,  or  any  political 
subdivision  thereof,  or  the  District  of  Columbia,  for  exclusively  public 
purposes ;  (b)  any  corporation,  or  community  chest,  fund,  or  foundation, 
organized  and  operated  exclusively  for  religious,  charitable,  scientific, 
literary,  or  educational  purposes,  including  posts  of  the  American  Legion 
or  the  Women's  Auxiliary  units  thereof,  or  for  the  prevention  of  cruelty 
to  children  or  animals,  no  part  of  the  net  earnings  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  individual;  or  (c)  the  special 
fund  for  vocational  rehabilitation  authorized  by  section  7  of  the  Voca- 
tional Rehabilitation  Act ;  to  an  amount  which  in  all  the  above  cases  com- 
bined does  not  exceed  15  per  centum  of  the  taxpayer's  net  income  as 
computed  without  the  benefit  of  this  paragraph.  In  case  of  a  nonresi- 
dent alien  individual  this  deduction  shall  be  allowed  only  as  to  contribu- 
tions or  gifts  made  to  domestic  corporations,  or  to  community  chests, 
funds,  or  foundations,  created  in  the  United  States,  or  to  such  vocational 
rehabilitation  fund.  Such  contributions  or  gifts  shall  be  allowable  as 
deductions  only  if  verified  under  rules  and  regulations  prescribed  by  the 
Commissioner,  with  the  approval  of  the  Secretary ; 

(12)  If  property  is  compulsorily  or  involuntarily  converted  into  cash 
or  its  equivalent  as  a  result  of  (a)  its  destruction  in  whole  or  in  part, 
(b)  theft  or  seizure,  or  (c)  an  exercise  of  the  power  of  requisition  or 
condemnation,  or  the  threat  or  imminence  thereof ;  and  if  the  taxpayer 
proceeds  forthwith  in  good  faith,  under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary,  to  expend  the  proceeds 
of  such  conversion  in  the  acquisition  of  other  property  of  a  character 
similar  or  related  in  service  or  use  to  the  property  so  converted,  or  in  the 
acquisition  of  80  per  centum  or  more  of  the  stock  or  shares  of  a  corpora- 
tion owning  such  other  property,  or  in  the  establishment  of  a  replacement 
fund,  then  there  shall  be  allowed  as  a  deduction  such  portion  of  the  gain 
derived  as  the  portion  of  the  proceeds  so  expended  bears  to  the  entire  pro- 
ceeds. The  provisions  of  this  paragraph  prescribing  the  conditions  under 
which  a  deduction  may  be  taken  in  respect  of  the  proceeds  or  gains  de- 
rived from  the  compulsory  or  involuntary  conversion  of  property  into 
cash  or  its  equivalent,  shall  apply  so  far  as  may  be  practicable  to  the  ex- 
emption or  exclusion  of  such  proceeds  or  gains  from  gross  income  under 
prior  income,  war-profits  and  excess-profits  tax  acts. 

Ill 


(b)  In  the  case  of  a  nonresident  alien  individual  the  deductions  al- 
lowed in  subdivision  (a),  except  those  allowed  in  paragraphs  (5),  (6), 
and  (11),  shall  be  allowed  only  if  and  to  the  extent  that  they  are  con- 
nected with  Income  from  sources  within  the  United  States ;  and  the  proper 
apportionment  and  allocation  of  the  deductions  with  respect  to  sources  of 
income  within  and  without  the  United  States  shall  be  determined  as  pro- 
vided in  section  217  under  rules  and  regulations  prescribed  by  the  Com- 
missioner with  the  approval  of  the  Secretary.  In  the  case  of  a  citizen 
entitled  to  the  benefits  of  section  262  the  deductions  shall  be  the  same  and 
shall  be  determined  in  the  same  manner  as  in  the  case  of  a  nonresident 
alien  individual. 

Items  not  Deductible. 

Sec.  215.  (a)  That  in  computing  net  income  no  deduction  shall  in 
any  case  be  allowed  in  respect  of — 

(1)  Personal,  living,  or  family  expenses; 

(2)  Any  amount  paid  out  for  new  buildings  or  for  permanent  im- 
provements or  betterments  made  to  increase  the  value  of  any  property  or 
estate ; 

(3)  Any  amount  expended  in  restoring  property  or  in  making  good 
the  exhaustion  thereof  for  which  an  allowance  is  or  has  been  made ;  or 

(4)  Premiums  paid  on  any  life  insurance  policy  covering  the  life  of 
any  officer  or  employee,  or  of  any  person  financially  interested  in  any 
trade  or  business  carried  on  by  the  taxpayer,  when  the  taxpayer  is  directly 
or  indirectly  a  beneficiary  under  such  policy. 

(b)  Amounts  paid  under  the  laws  of  any  State,  Territory,  District  of 
Columbia,  possession  of  the  United  States,  or  foreign  country  as  income 
to  the  holder  of  a  life  or  terminable  interest  acquired  by  gift,  bequest,  or 
inheritance  shall  not  be  reduced  or  diminished  by  any  deduction  for 
shrinkage  (by  whatever  name  called)  in  the  value  of  such  interest  due 
to  the  lapse  of  time,  nor  by  any  deduction  allowed  by  this  Act  for  the 
purpose  of  computing  the  net  income  of  an  estate  or  trust  but  not  allowed 
under  the  laws  of  such  State,  Territory,  District  of  Columbia,  possession 
of  the  United  States,  or  foreign  country  for  the  purpose  of  computing 
the  income  to  which  such  holder  is  entitled. 

Credits  Allowed   Individuals. 

Sec.  216.  That  for  the  purpose  of  the  normal  tax  only  there  shall 
be  allowed  the  following  credits : 

(a)  The  amount  received  as  dividends  (1)  from  a  domestic  corpora- 
tion other  than  a  corporation  entitled  to  the  benefits  of  section  262,  or 
(2)  from  a  foreign  corporation  when  it  is  shown  to  the  satisfaction  of 
the  Commissioner  that  more  than  50  per  centum  of  the  gross  income  of 
such  foreign  corporation  for  the  three-year  period  ending  with  the  close 
of  its  taxable  year  preceding  the  declaration  of  such  dividends  (or  for 
such  part  of  such  period  as  the  corporation  has  been  in  existence)  was 
derived  from  sources  within  the  United  States  as  determined  under  the 
provisions  of  section  217; 

(b)  The  amount  received  as  interest  upon  obligations  of  the  United 
States  and  bonds  issued  by  the  War  Finance  Corporation,  which  is  in- 
cluded in  gross  income  under  section  213 ; 

(c)  In  the  case  of  a  single  person,  a  personal  exemption  of  $1,OC)0; 
or  in  the  case  of  the  head  of  a  family  or  a  married  person  living  with 
husband  or  wife,  a  personal  exemption  of  $2,500,  unless  the  net  income 
is  in  excess  of  $5,000,  in  which  case  the  personal  exemption  shall  be 
$2,000.  A  husband  and  wife  living  together  shall  receive  but  one  per- 
sonal exemption.  The  amount  of  such  personal  exemption  shall  be  $2,500, 
unless  the  aggregate  net  incoi^e  of  such  husband  and  wife  is  in  excess 

112 


of  $5,000,  in  which  case  the  amount  of  such  personal  exemption  shall  be 
$2,000.  If  such  husband  and  wife  make  separate  returns,  the  personal  ex- 
emption may  be  taken  by  either  or  divided  between  them.  In  no  case 
shall  the  reduction  of  the  personal  exemption  from  $2,500  to  $2,000  oper- 
ate to  increase  the  tax,  which  would  be  payable  if  the  exemption  were 
$2,500,  by  more  than  the  amount  of  the  net  income  in  excess  of  $5,000; 

(d)  $400  for  each  person  (other  than  husband  or  wife)  dependent 
upon  and  receiving  his  chief  support  from  the  taxpayer  if  such  dependent 
person  is  under  eighteen  years  of  age  or  is  incapable  of  self-support 
because  mentally  or  physically  defective ; 

(e)  In  the  case  of  a  nonresident  alien  individual  or  of  a  citizen 
entitled  to  the  benefits  of  section  262,  the  personal  exemption  shall  be 
only  $1,000,  and  he  shall  not  be  entitled  to  the  credit  provided  in  subdivi- 
sion (d). 

(f)  The  credits  allowed  by  subdivisions  (c),  (d),  and  (e)  of  this 
section  shall  be  determined  by  the  status  of  the  taxpayer  on  the  last  day 
of  the  period  for  which  the  return  of  income  is  made ;  but  in  the  case  of 
an  individual  who  dies  during  the  taxable  year,  such  credits  shall  be  de- 
termined by  his  status  at  the  time  of  his  death,  and  in  such  case  full 
credits  shall  be  allowed  to  the  surviving  spouse,  if  any,  according  to  his 
or  her  status  at  the  close  of  the  period  for  which  such  survivor  makes 
return  of  income. 

Net  Income  of  Nonresident  Alien  Individuals. 

Sec.  217.  (a)  That  in  the  case  of  a  nonresident  alien  individual  or 
of  a  citizen  entitled  to  the  benefits  of  section  262,  the  following  items  of 
gross  income  shall  be  treated  as  income  from  sources  within  the  United 
States : 

(1)  Interest  on  bonds,  notes,  or  other  interest-bearing  obligations  of 
residents,  corporate  or  otherwise,  not  including  (a)  interest  on  deposits 
with  persons  carrying  on  the  banking  business  paid  to  persons  not  engaged 
in  business  within  the  United  States  and  not  having  an  office  or  place  of 
business  therein,  or  (b)  interest  received  from  a  resident  alien  in- 
dividual or  a  resident  foreign  corporation  when  it  is  shown  to  the  satis- 
faction of  the  Commissioner  that  less  than  20  per  centum  of  the  gross 
income  of  such  resident  payor  has  been  derived  from  sources  within  the 
United  States,  as  determined  under  the  provisions  of  this  section,  for  the 
three-year  period  ending  with  the  close  of  the  taxable  year  of  such 
payor,  or  for  such  part  of  such  period  immediately  preceding  the  close  of 
such  taxable  year  as  may  be  applicable ; 

(2)  The  amount  received  as  dividends  (a)  from  a  domestic  corpora- 
tion other  than  a  corporation  entitled  to  the  benefits  of  section  262,  or 
(b)  from  a  foreign  corporation  unless  less  than  50  per  centum  of  the 
gross  income  of  such  foreign  corporation  for  the  three-year  period  end- 
ing with  the  close  of  its  taxable  year  preceding  the  declaration  of  such 
dividends  (or  for  such  part  of  such  period  as  the  corporation  has  been 
in  existence)  was  derived  from  sources  within  the  United  States  as  de- 
termined under  the  provisions  of  this  section ; 

(3)  Compensation  for  labor  or  personal  services  performed  in  the 
United  States ; 

(4)  Rentals  or  royalties  from  property  located  in  the  United  States 
or  from  any  interest  in  such  property,  including  rentals  or  royalties  for 
the  use  of  or  for  the  privilege  of  using  in  the  United  States,  patents, 
copyrights,  secret  processes  and  formulas,  good  will,  trade-marks,  trade 
brands,  franchises,  and  other  like  property ;  and 

(5)  Gains,  profits,  and  income  from  the  sale  of  real  property  located 
in  the  United  States. 

113 


(b)  From  the  items  of  gross  income  specified  in  subdivision  (a) 
there  shall  be  deducted  the  expenses,  losses,  and  other  deductions  properly 
apportioned  or  allocated  thereto  and  a  ratable  part  of  any  expenses, 
losses,  or  other  deductions  which  can  not  definitely  be  allocated  to  some 
item  or  class  of  gross  income.  The  remainder,  if  any,  shall  be  included 
in  full  as  net  income  from  sources  within  the  United  States. 

(c)  The  following  items  of  gross  income  shall  be  treated  as  income 
from  sources  without  the  United  States : 

(1)  Interest  other  than  that  derived  from  sources  within  the  United 
States  as  provided  in  paragraph  (1)  of  subdivision  (a)  ; 

(2)  Dividends  other  than  those  derived  from  sources  within  the 
United  States  as  provided  in  paragraph   (2)  of  subdivision  (a)  ; 

(3)  Compensation  for  labor  or  personal  service  performed  without 
the  United  States ; 

(4)  Rentals  or  royalties  from  property  located  without  the  United 
States  or  from  any  interest  in  such  property,  including  rentals  or  royalties 
for  the  use  of  or  for  the  privilege  of  using  without  the  United  States, 
patents,  copyrights,  secret  processes  and  formulas,  good  will,  trade-marks, 
trade  brands,  franchises,  and  other  like  property ;  and 

(5)  Gains,  profits,  and  income  from  the  sale  of  real  property  located 
without  the  United  States. 

(d)  From  the  items  of  gross  income  specified  in  subdivision  (c) 
there  shall  be  deducted  the  expenses,  losses,  and  other  deductions  properly 
apportioned  or  allocated  thereto,  and  a  ratable  part  of  any  expenses, 
losses,  or  other  deductions  which  can  not  definitely  be  allocated  to  some 
item  or  class  of  gross  income.  The  remainder,  if  any,  shall  be  treated 
in  full  as  net  income  from  sources  without  the  United  States. 

(e)  Items  of  gross  income,  expenses,  losses  and  deductions,  other 
than  those  specified  in  subdivisions  (a)  and  (c),  shall  be  allocated  or 
apportioned  to  sources  within  or  without  the  United  States  under  rules 
and  regulations  prescribed  by  the  Commissioner  with  the  approval  of  the 
Secretary.  Where  items  of  gross  income  are  separately  allocated  to 
sources  within  the  United  States,  there  shall  be  deducted  (for  the  pur- 
pose of  computing  the  net  income  therefrom)  the  expenses,  losses  and 
other  deductions  properly  apportioned  or  allocated  thereto  and  a  ratable 
part  of  other  expenses,  losses  or  other  deductions  which  can  not  definitely 
be  allocated  to  some  item  or  class  of  gross  income.  The  remainder, 
if  any,  shall  be  included  in  full  as  net  income  from  sources  within  the 
United  States.  In  the  case  of  gross  income  derived  from  sources  partly 
within  and  partly  without  the  United  States,  the  net  income  may  first  be 
computed  by  deducting  the  expenses,  losses  or  other  deductions  appor- 
tioned or  allocated  thereto  and  a  ratable  part  of  any  expenses,  losses  or 
other  deductions  which  can  not  definitely  be  allocated  to  some  item  or 
class  of  gross  income;  and  the  portion  of  such  net  income  attributable  to 
sources  within  the  United  States  may  be  determined  by  processes  or  for- 
mulas of  general  apportionment  prescribed  by  the  Commissioner  with 
the  approval  of  the  Secretary.  Gains,  profits  and  income  from  (1)  trans- 
portation or  other  services  rendered  partly  within  and  partly  without 
the  United  States,  or  (2)  from  the  sale  of  personal  property  produced 
(in  whole  or  in  part)  by  the  taxpayer  within  and  sold  without  the  United 
States,  or  produced  (in  whole  or  in  part)  by  the  taxpayer  without  and 
sold  within  the  United  States,  shall  be  treated  as  derived  partly  from 
sources  within  and  partly  from  sources  without  the  United  States.  Gains, 
profits  and  income  derived  from  the  purchase  of  personal  property  within 
and  its  sale  without  the  United  States  or  from  the  purchase  of  personal 
property  without  and  its  sale  within  the  United  States,  shall  be  treated  as 
derived  entirely  from  the  country  in  which  sold. 

114 


(f)  As  used  in  this  section  the  words  "sale"  or  "sold"  include  "ex- 
change" or  "exchanged" ;  and  the  word  "produced"  includes  "created," 
"fabricated,"  "manufactured,"  "extracted,"  "processed,"  "cured,"  or 
"aged." 

(g)  A  nonresident  alien  individual  or  a  citizen  entitled  to  the  benefits 
of  section  262  shall  receive  the  benefit  of  the  deductions  and  credits  al- 
lowed in  this  title  only  by  filing  or  causing  to  be  filed  with  the  collector 
a  true  and  accurate  return  of  his  total  income  received  from  all  sources 
corporate  or  otherwise  in  the  United  States,  in  the  manner  prescribed  in 
this  title;  including  therein  all  the  information  which  the  Commissioner 
may  deem  necessary  for  the  calculation  of  such  deductions  and  credits : 
Provided,  That  the  benefit  of  the  credit  allowed  in  subdivision  (e)  of 
section  216  mav.  in  the  discretion  of  the  Commissioner,  be  received  by 
filing  a  claim  therefor  with  the  withholding  agent.  In  case  of  failure  to 
file  a  return,  the  collector  shall  collect  the  tax  on  such  income,  and  all 
property  belonging  to  such  nonresident  alien  individual  or  foreign  trader 
shall  be  liable  to  distraint  for  the  tax. 

Partnerships  and  Personal  Service  Corporations. 

Sec.  218.  (a)  That  individuals  carrying  on  business  in  partnership 
shall  be  liable  for  income  tax  only  in  their  individual  capacity.  There 
shall  be  included  in  computing  the  net  income  of  each  partner  his  dis- 
tributive share,  whether  distributed  or  not,  of  the  net  income  of  the  part- 
nership for  the  taxable  year,  or.  if  his  net  income  for  such  taxable  year  is 
computed  upon  the  basis  of  a  period  different  from  that  upon  the  basis  of 
which  the  net  income  of  the  partnership  is  computed,  then  his  distributive 
share  of  the  net  income  of  the  partnership  for  any  accounting  period  of 
the  partnership  ending  within  the  fiscal  or  calendar  year  upon  the  basis  of 
which  the  partner's  net  income  is  computed. 

(b)  The  partner  shall,  for  the  purpose  of  the  normal  tax,  be  allowed 
as  credits,  in  addition  to  the  credits  allowed  to  him  under  section  216,  his 
proportionate  share  of  such  amounts  specified  in  subdivisions  (a)  and  (b) 
of  section  216  as  are  received  by  the  partnership. 

(c)  The  net  income  of  the  partnership  shall  be  computed  in  the  same 
manner  and  on  the  same  basis  as  provided  in  section  212  except  that  the 
deduction  provided  in  paragraph  (11)  of  subdivision  (a)  of  section  214 
shall  not  be  allowed. 

(d)  Personal  service  corporations  shall  not  be  subject  to  taxation 
under  this  title,  but  the  individual  stockholders  thereof  shall  be  taxed  in 
the  same  manner  as  the  members  of  partnerships.  All  the  provisions  of 
this  title  relating  to  partnerships  and  the  members  thereof  shall  so  far  as 
practicable  apply  to  personal  service  corporations  and  the  stockholders 
thereof :  Provided,  That  for  the  purpose  of  this  subdivision  amounts  dis- 
tributed by  a  personal  service  corporation  during  its  taxable  year  shall 
be  accounted  for  by  the  distributees  ;  and  any  portion  of  the  net  income 
remaining  undistributed  at  the  close  of  its  taxable  year  shall  be  accounted 
for  bv  the  stockholders  of  such  corporation  at  the  close  of  its  taxable 
year  in  proportion  to  their  respective  shares. 

This  subdivision  shall  not  be  in  effect  after  December  31.  1921.  In 
the  case  of  a  personal  service  corporation  having  a  fiscal  year  beginning 
in  1921  and  ending  in  1922,  amounts  distributed  prior  to  January  1,  1922, 
to  its  stockholders  out  of  earnings  or  profits  accumulated  after  December 
31,  1920,  shall  be  taxed  to  the  distributees ;  and  the  stockholders  of  record 
on  December  31,  1921,  shall  be  taxed  upon  their  distributive  shares  of  the 
difference  (if  any)  between  such  distributive  profits  and  the  portion  of 
the  corporation's  net  income  assignable  to  the  calendar  year  1921,  deter- 
mined in  the  manner  provided  in  clause  (1)  of  subdivision  (c)  of  section 
205  of  this  Act. 

lis 


Estates  and  Trusts. 

Sec.  219.  (a)  That  the  tax  imposed  by  sections  210  and  211  shall 
apply  to  the  income  of  estates  or  of  any  kind  of  property  held  in  trust, 
including — 

(1)  Income  received  by  estates  of  deceased  persons  during  the  period 
of  administration  or  settlement  of  the  estate; 

(2)  Income  accumulated  in  trust  for  the  benefit  of  unborn  or  un- 
ascertained persons  or  persons  with  contingent  interests ; 

(3)  Income  held  for  future  distribution  under  the  terms  of  the  will 
or  trust ;  and 

(4)  Income  which  is  to  be  distributed  to  the  beneficiaries  periodically, 
whether  or  not  at  regular  intervals,  and  the  income  collected  by  a  guardian 
of  an  infant  to  be  held  or  distributed  as  the  court  may  direct. 

(b)  The  fiduciary  shall  be  responsible  for  making  the  return  of  in- 
come for  the  estate  or  trust  for  which  he  acts.  The  net  income  of  the 
estate  or  trust  shall  be  computed  in  the  same  manner  and  on  the  same 
basis  as  provided  in  section  212,  except  that  (in  lieu  of  the  deduction 
authorized  by  paragraph  (11)  of  subdivision  (a)  of  section  214)  there 
shall  also  be  allowed  as  a  deduction,  without  limitation,  any  part  of  the 
gross  income  which,  pursuant  to  the  terms  of  the  will  or  deed  creating  the 
trust,  is  during  the  taxable  year  paid  or  permanently  set  aside  for  the 
purposes  and  in  the  manner  specified  in  paragraph  (11)  of  subdivision  (a) 
of  section  214.  In  cases  in  which  there  is  any  income  of  the  class  de- 
scribed in  paragraph  (4)  of  subdivision  (a)  of  this  section  the  fiduciary 
shall  include  in  the  return  a  statement  of  the  income  of  the  estate  or  trust 
which,  pursuant  to  the  instrument  or  order  governing  the  distribution,  is 
distributable  to  each  beneficiary,  whether  or  not  distributed  before  the 
close  of  the  taxable  year  for  which  the  return  is  made. 

(c)  In  cases  under  paragraphs  (1),  (2),  or  (.3)  of  subdivision  (a) 
or  in  any  other  case  within  subdivision  (a)  of  this  section  except  para- 
graph (4)  thereof  the  tax  shall  be  imposed  upon  the  net  income  of  the 
estate  or  trust  and  shall  be  paid  by  the  fiduciary,  except  that  in  determin- 
ing the  net  income  of  the  estate  of  any  deceased  person  during  the  period 
of  administration  or  settlement  there  may  be  deducted  the  amount  of  any 
income  properly  paid  or  credited  to  any  legatee,  heir,  or  other  beneficiary. 
In  such  cases  the  estate  or  trust  shall,  for  the  purpose  of  the  normal  tax, 
be  allowed  the  same  credits  as  are  allowed  to  single  persons  under  section 
216. 

(d)  In  cases  under  paragraph  (4)  of  subdivision  (a),  and  in  the 
case  of  any  income  of  an  estate  during  the  period  of  administration  or 
settlement  permitted  bv  subdivision  (c)  to  be  deducted  from  the  net  in- 
come upon  which  tax  is  to  be  paid  by  the  fiduciary,  the  tax  shall  not  be 
paid  by  the  fiduciary,  but  there  shall  be  included  in  computing  the  net  in- 
come of  each  beneficiary  that  part  of  the  income  of  the  estate  or  trust 
for  its  taxable  year  which,  pursuant  to  the  instrument  or  order  governing 
the  distribution,  is  distributable  to  such  beneficiary,  whether  distributed  or 
not.  or.  if  his  taxable  vear  is  different  from  that  of  the  estate  or  trust, 
then  there  shall  be  included  in  computing  his  net  income  his  distributive 
share  of  the  income  of  the  estate  or  trust  for  its  taxable  year  ending 
within  the  taxable  year  of  the  beneficiary.  In  such  cases  the  beneficiary 
shall,  for  the  purpose  of  the  normal  tax,  be  allowed  as  credits,  in  addi- 
tion to  the  credits  allowed  to  him  under  section  216,  his  proportionate 
share  of  such  amounts  specified  in  subdivisions  (a)  and  (b)  of  section 
216  as  are  received  by  the  estate  or  trust. 

(e)  In  the  case  of  an  estate  or  trust  the  income  of  which  consists 
both  of  income  of  the  class  described  in  paragraph  (4)  of  subdivision  (a) 
of  this  section  and  other  income,  the  net  income  of  the  estate  or  trust 
shall  be  computed  and  a  return  thereof  made  by  the  fiduciary  in  accordance 

116 


with  subdivision  (b)  and  the  tax  shall  be  imposed,  and  shall  be  paid  by 
the  fiduciary  in  accordance  with  subdivision  (c),  except  that  there  shall 
be  allowed  as  an  additional  deduction  in  computing  the  net  income  of  the 
estate  or  trust  that  part  of  its  income  of  the  class  described  in  paragraph 
(4)  of  subdivision  (a)  which,  pursuant  to  the  instrument  or  order  govern- 
ing the  distribution,  is  distributable  during  its  taxable  year  to  the  bene- 
ficiaries. In  cases  under  this  subdivision  there  shall  be  included,  as  pro- 
vided in  subdivision  (d)  of  this  section,  in  computing  the  net  income  of 
each  beneficiary,  that  part  of  the  income  of  the  estate  or  trust  which, 
pursuant  to  the  instrument  or  order  governing  the  distribution,  is  dis- 
tributable during  the  taxable  year  to  such  beneficiary. 

(f)  A  trust  created  by  an  employer  as  a  part  of  a  stock  bonus  or 
profit-sharing  plan  for  the  exclusive  benefit  of  some  or  all  of  his  em- 
ployees, to  which  contributions  are  made  by  such  employer,  or  employees, 
or  both,  for  the  purpose  of  distributing  to  such  employees  the  earnings 
and  principal  of  the  fund  accumulated  by  the  trust  in  accordance  with 
such  plan,  shall  not  be  taxable  under  this  section,  but  the  amount  actually 
distributed  or  made  available  to  any  distributee  shall  be  taxable  to  him 
in  the  year  in  which  so  distributed  or  made  available  to  the  extent  that 
it  exceeds  the  amounts  paid  in  by  him.  Such  distributees  shall  for  the 
purpose  of  the  normal  tax  be  allowed  as  credits  that  part  of  the  amount 
so  distributed  or  made  available  as  represents  the  items  specified  in  sub- 
divisions (a)  and  (b)  of  section  216. 

Evasion  of  Surtaxes  by  Incorporation. 

Sec.  220.  That  if  any  corporation,  however  created  or  organized,  is 
formed  or  availed  of  for  the  purpose  of  preventing  the  imposition  of  the 
surtax  upon  its  stockholders  or  members  through  the  medium  of  per- 
mitting its  gains  and  profits  to  accumulate  instead  of  being  divided  or 
distributed,  there  shall  be  levied,  collected,  and  paid  for  each  taxable  year 
upon  the  net  income  of  such  corporation  a  tax  equal  to  25  per  centum  of 
the  amount  thereof,  which  shall  be  in  addition  to  the  tax  imposed  by 
section  230  of  this  title  and  shall  be  computed,  collected,  and  paid  upon 
the  same  basis  and  in  the  same  manner  and  subject  to  the  same  provisions 
of  law,  including  penalties,  as  that  tax:  Provided,  That  if  all  the  stock- 
holders or  members  of  such  corporation  agree  thereto,  the  Commissioner 
may,  in  lieu  of  all  income,  war-profits  and  excess-profits  taxes  imposed 
upon  the  corporation  for  the  taxable  year,  tax  the  stockholders  or  mem- 
bers of  such  corporation  upon  their  distributive  shares  in  the  net  income 
of  the  corporation  for  the  taxable  year  in  the  same  manner  as  provided  in 
subdivision  (a)  of  section  218  in  the  case  of  members  of  a  partnership. 
The  fact  that  any  corporation  is  a  mere  holding  company,  or  that  the 
gains  and  profits  are  permitted  to  accumulate  beyond  the  reasonable  needs 
of  the  business,  shall  be  prima  facie  evidence  of  a  purpose  to  escape  the 
surtax :  but  the  fact  that  the  gains  and  profits  are  in  any  case  permitted  tg 
accumulate  and  become  surplus  shall  not  be  construed  as  evidence  of  a 
purpose  to  escape  the  tax  in  such  case  unless  the  Commissioner  certifies 
that  in  his  opinion  such  accumulation  is  unreasonable  for  the  purposes 
of  the  business.  When  requested  by  the  Commissioner,  or  any  collector, 
every  corporation  shall  forward  to  him  a  correct  statement  of  such  gains 
and  profits  and  the  names  and  addresses  of  the  individuals  or  shareholders 
who  would  be  entitled  to  the  same  if  divided  or  distributed,  and  of  the 
amounts  that  would  be  payable  to  each. 

Payment  of  Individual's  Tax  at  Source. 

Sec.  221.  (a)  That  all  individuals,  corporations,  and  partnerships, 
in  whatever  capacity  acting,  including  lessees  or  mortgagors  of  real  or 
personal  property,  fiduciaries,  employers,  and  all  officers  and  employees 
of  the  United  States  having  the  control,  receipt,  custody,  disposal,  or  pay- 
ment of  interest   (except  interest  on  deposits  with  persons  carrying  on  the 

117 


banking  business  paid  to  persons  not  engaged  in  business  in  the  United 
States  and  not  having  an  office  or  place  of  business  therein),  rent,  salaries, 
wages,  premiums,  annuities,  compensations,  remunerations,  emoluments,  or 
other  fixed  or  determinable  annual  or  periodical  gains,  profits,  and  income, 
of  any  nonresident  alien  individual  or  partnership  composed  in  whole  or 
in  part  of  nonresident  aliens  (other  than  income  received  as  dividends  of 
the  class  allowed  as  a  credit  by  subdivision  (a)  of  section  216)  shall 
(except  in  the  cases  provided  for  in  subdivision  (b)  and  except  as  other- 
wise provided  in  regulations  prescribed  by  the  Commissioner  under  section 
217)  deduct  and  withhold  from  such  annual  or  periodical  gains,  profits, 
and  income  a  tax  equal  to  8  per  centum  thereof :  Provided,  That  the  Com- 
missioner may  authorize  such  tax  to  be  deducted  and  withheld  from  the 
interest  upon  any  securities  the  owners  of  which  are  not  known  to  the 
withholding  agent. 

(b)  In  any  case  where  bonds,  mortgages,  or  deeds  of  trust,  or  other 
similar  obligations  of  a  corporation  contain  a  contract  or  provision  by 
which  the  obligor  agrees  to  pay  any  portion  of  the  tax  imposed  by  this 
title  upon  the  obligee,  or  to  reimburse  the  obligee  for  any  portion  of  the 
tax,  or  to  pay  the  interest  without  deduction  for  any  tax  which  the 
obligor  may  be  required  or  permitted  to  pay  thereon,  or  to  retain  there- 
from under  any  law  of  the  United  States,  the  obligor  shall  deduct  and 
withhold  a  tax  equal  to  2  per  centum  of  the  interest  upon  such  bonds, 
mortgages,  deeds  of  trust,  or  other  obligations,  whether  such  interest  is 
payable  annually  or  at  shorter  or  longer  periods  and  whether  payable  to 
a  nonresident  alien  individual  or  to  an  individual  citizen  or  resident  of 
the  United  States  or  to  a  partnership :  Provided,  That  the  Commissioner 
may  authorize  such  tax  to  be  deducted  and  withheld  in  the  case  of  in- 
terest upon  any  such  bonds,  mortgages,  deeds  of  trust,  or  other  obligations, 
the  owners  of  which  are  not  known  to  the  withholding  agent.  Such  deduc- 
tion and  withholding  shall  not  be  required  in  the  case  of  a  citizen  or 
resident  entitled  to  receive  such  interest,  if  he  files  with  the  withholding 
agent  on  or  before  February  1  a  signed  notice  in  writing  claiming  the 
benefit  of  the  credits  provided  in  subdivisions  (c)  and  (d)  of  section  216; 
nor  in  the  case  of  a  nonresident  alien  individual  if  so  provided  for  in 
regulations  prescribed  by  the  Commissioner  under  subdivision  (g)  of 
section  217. 

(c)  Every  individual,  corporation,  or  partnership  required  to  deduct 
and  withhold  any  tax  under  this  section  shall  make  return  thereof  on  or 
before  March  1  of  each  year  and  shall  on  or  before  June  15  pay  the  tax 
to  the  official  of  the  United  States  Government  authorized  to  receive  it. 
Every  such  individual,  corporation,  or  partnership  is  hereby  made  liable  for 
such  tax  and  is  hereby  indemnified  against  the  claims  and  demands  of 
any  individual,  corporation,  or  partnership  for  the  amount  of  any  pay- 
ments made  in  accordance  with  the  provisions  of  this  section. 

(d)  Income  upon  which  any  tax  is  required  to  be  withheld  at  the 
source  under  this  section  shall  be  included  in  the  return  of  the  recipient 
of  such  income,  but  any  amount  of  tax  so  withheld  shall  be  credited 
against  the  amount  of  income  tax  as  computed  in  such  return. 

(e)  If  any  tax  required  under  this  section  to  be  deducted  and  with- 
held is  paid  by  the  recipient  of  the  income,  it  shall  not  be  recollected  from 
the  withholding  agent;  nor  in  cases  in  which  the  tax  is  so  paid  shall  any 
penalty  be  imposed  upon  or  collected  from  the  recipient  of  the  income  or 
the  withholding  agent  for  failure  to  return  or  pay  the  same,  unless 
such  failure  was  fraudulent  and  for  the  purpose  of  evading  payment. 

Credit  for  Taxes  in  Case  of  Individuals. 

Sec.  222.  (a)  That  the  tax  computed  under  Part  II  of  this  title 
shall  be  credited  with : 

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(1)  In  the  case  of  a  citizen  of  the  United  States,  the  amount  of  any 
income,  war-profits  and  excess-profits  taxes  paid  during  the  taxable  year 
to  any  foreign  country  or  to  any  possession  of  the  United  States ;  and 

(2)  In  the  case  of  a  resident  of  the  United  States,  the  amount  of 
any  such  taxes  paid  during  the  taxable  year  to  any  possession  of  the 
United    States ;   and 

(3)  In  the  case  of  an  alien  resident  of  the  United  States,  the  amount 
of  any  such  taxes  paid  during  the  taxable  year  to  any  foreign  country, 
if  the  foreign  country  of  which  such  alien  resident  is  a  citizen  or  subject, 
in  imposing  such  taxes,  allows  a  similar  credit  to  citizens  of  the  United 
States  residing  in  such  country ;  and 

(4)  In  the  case  of  any  such  individual  who  is  a  member  of  a  part- 
nership or  a  beneficiary  of  an  estate  or  trust,  his  proportionate  share  of 
such  taxes  of  the  partnership  or  the  estate  or  trust  paid  during  the  taxable 
year  to  a  foreign  country  or  to  any  possession  of  the  United  States,  as 
the  case  may  be. 

(5)  The  above  credits  shall  not  be  allowed  in  the  case  of  a  citizen 
entitled  to  the  benefits  of  section  262 ;  and  in  no  other  case  shall  the 
amount  of  credit  taken  under  this  subdivision  exceed  the  same  proportion 
of  the  tax,  against  which  such  credit  is  taken,  which  the  taxpayer's  net  in- 
come (computed  without  deduction  for  any  income,  war-profits  and  ex- 
cess-profits taxes  imposed  by  any  foreign  country  or  possession  of  the 
United  States)  from  sources  without  the  United  States  bears  to  his  entire 
net  income  (computed  without  such  deduction)  for  the  same  taxable  year. 

(b)  If  accrued  taxes  when  paid  dififer  from  the  amounts  claimed  as 
credits  bv  the  taxpayer,  or  if  anv  tax  paid  is  refunded  in  whole  or  in 
part,  the  taxpayer  shall  notify  the  Commissioner,  who  shall  redetermine 
the  amount  of  the  tax  due  under  Part  II  of  this  title  for  the  year  or  years 
affected,  and  the  amount  of  tax  due  upon  such  redetermination,  if  any, 
shall  be  paid  by  the  taxpayer  upon  notice  and  demand  by  the  collector, 
or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or  refunded  to 
the  taxpayer  in  accordance  with  the  provisions  of  section  252.  In  the 
case  of  such  a  tax  accrued  but  not  paid,  the  Commissioner  as  a  condition 
precedent  to  the  allowance  of  this  credit  may  require  the  taxpayer  to  give 
a  bond  with  sureties  satisfactory  to  and  to  be  approved  by  the  Commis- 
sioner in  such  penal  sum  as  the  Commissioner  may  require,  conditioned 
for  the  payment  by  the  taxpayer  of  any  amount  of  tax  found  due  upon 
any  such  redetermination ;  and  the  bond  herein  prescribed  shall  contain 
such  further  conditions  as  the  Commissioner  may  require. 

(c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes  evi- 
dence satisfactory  to  the  Commissioner  showing  the  amount  of  income 
derived  from  sources  without  the  United  States,  and  all  other  information 
necessary  for  the  verification  and  computation  of  such  credits. 

(d)  If  the  taxpayer  makes  a  return  for  a  fiscal  year  beginning  in 
1920  and  ending  in  1921,  the  credit  for  the  entire  fiscal  year  shall,  not- 
withstanding any  provision  of  this  Act,  be  determined  under  the  provi- 
sions of  this  section ;  and  the  Commissioner  is  authorized  to  disallow,  in 
whole  or  part,  any  such  credit  which  he  finds  has  already  been  taken  by  the 
taxpayer. 

Individual  Returns. 

Sec.  223.  (a)  That  the  following  individuals  shall  each  make  under 
oath  a  return  stating  specifically  the  items  of  his  gross  income  and  the 
deductions  and  credits  allowed  under  this  title — 

(1)  Every  individual  having  a  net  income  for  the  taxable  year  of 
$1,000  or  over,  if  single,  or  if  married  and  not  living  with  husband  or 
wife; 

119 


(2)  Every  individual  having  a  net  income  for  the  taxable  year  of 
$2,000  or  over,  if  married  and  living  with  husband  or  wife ;  and 

(3)  Every  individual  having  a  gross  income  for  the  taxable  year  of 
$5,000  or  over,  regardless  of  the  amount  of  his  net  income. 

(b)  If  a  husband  and  wife  living  together  have  an  aggregate  net 
income  for  the  taxable  year  of  $2,0()0  or  over,  or  an  aggregate  gross 
income  for  such  year  of  $5,000  or  over — 

(1)  Each  shall  make  such  a  return,  or 

(2)  The  income  of  each  shall  be  included  in  a  single  joint  return, 
in  which  case  the  tax  shall  be  computed  on  the  aggregate  income. 

(c)  If  the  taxpayer  is  unable  to  make  his  own  return,  the  return 
shall  be  made  by  a  duly  authorized  agent  or  by  the  guardian  or  other 
person  charged  with  the  care  of  the  person  or  property  of  such  taxpayer. 

Partnership  Returns. 

Sec.  224.  That  every  partnership  shall  make  a  return  for  each  taxable 
year,  stating  specifically  the  items  of  its  gross  income  and  the  deductions 
allowed  by  this  title,  and  shall  include  in  the  return  the  names  and  ad- 
dresses of  the  individuals  who  would  be  entitled  to  share  in  the  net  income 
if  distributed  and  the  amount  of  the  distributive  share  of  each  individual. 
The  return  shall  be  sworn  to  by  any  one  of  the  partners. 

Fiduciary  Returns. 

Sec.  225.  (a)  That  every  fiduciary  (except  a  receiver  appointed  by 
authority  of  law  in  possession  of  part  only  of  the  property  of  an  in- 
dividual) shall  make  under  oath  a  return  for  any  of  the  following  in- 
dividuals, estates,  or  trusts  for  which  he  acts,  stating  specifically  the  items 
of  gross  income  thereof  and  the  deductions  and  credits  allowed  under  this 
title— 

(1)  Every  individual  having  a  aet  income  for  the  taxable  year  of 
$1,000  or  over,  if  single,  or  if  married  and  not  living  with  husband  or 
wife; 

(2)  Every  individual  having  a  net  income  for  the  taxable  year  of 
$2,000  or  over,  if  married  and  living  with  husband  or  wife; 

(3)  Every  individual  having  a  gross  income  for  the  taxable  year  of 
$5,000  or  over,  regardless  of  the  amount  of  his  net  income ; 

(4)  Every  estate  or  trust  the  net  income  of  which  for  the  taxable 
year  is  $1,000  or  over;  and 

(5)  Every  estate  or  trust  of  which  any  beneficiary  is  a  nonresident 
alien. 

(b)  Under  such  regulations  as  the  Commissioner  with  the  approval 
of  the  Secretary  may  prescribe  a  return  made  by  one  of  two  or  more 
joint  fiduciaries  and  filed  in  the  ofiice  of  the  collector  of  the  district  where 
such  fiduciary  resides  shall  be  sufficient  compliance  with  the  above  re- 
quirement. Such  fiduciary  shall  make  oath  (1)  that  he  has  sufficient 
knowledge  of  the  affairs  of  the  individual,  estate  or  trust  for  which  the 
return  is  made,  to  enable  him  to  make  the  return,  and  (2)  that  the  return 
is,  to  the  best  of  his  knowledge  and  belief,  true  and  correct.  Any  fiduciary 
required  to  make  a  return  under  this  Act  shall  be  subject  to  all  the  pro- 
visions of  this  Act  which  apply  to  individuals. 

Returns  for  a  Period  of   Less  than   Twelve   Months, 

Sec.  226.  (a)  That  if  a  taxpayer,  with  the  approval  of  the  Com- 
missioner, changes  the  basis  of  computing  net  income  from  fiscal  year  to 
calendar  year  a  separate  return  shall  be  made  for  the  period  between  the 
close  of  the  last  fiscal  year  for  which  return  was  made  and  the  following 

120 


December  31.  If  the  change  is  from  calendar  year  to  fiscal  year,  a  sep- 
arate return  shall  be  made  for  the  period  between  the  close  of  the  last 
calendar  year  for  which  return  was  made  and  the  date  designated  as  the 
close  of  the  fiscal  year.  If  the  change  is  from  one  fiscal  year  to  another 
fiscal  year  a  separate  return  shall  be  made  for  the  period  between  the 
close  of  the  former  fiscal  year  and  the  date  designated  as  the  close  of  the 
new  fiscal  year. 

(b)  In  all  cases  where  a  separate  return  is  made  for  a  part  of  a 
taxable  year  the  net  income  shall  be  computed  on  the  basis  of  such  period 
for  which  separate  return  is  made,  and  the  tax  shall  be  paid  thereon  at  the 
rate  for  the  calendar  year  in  which  such  period  is  included. 

(c)  In  the  case  of  a  return  for  a  period  of  less  than  one  year  the 
net  income  shall  be  placed  on  an  annual  basis  by  multiplying  the  amount 
thereof  by  twelve  and  dividing  by  the  number  of  months  included  in  such 
period ;  and  the  tax  shall  be  such  part  of  a  tax  computed  on  such  annual 
basis  as  the  number  of  months  in  such  period  is  of  twelve  months. 

Time   and    Place   for   Filing   Individual,   Partnership,    and   Fiduciary 

Returns. 

Sec.  227.  (a)  That  returns  (except  in  the  case  of  nonresident  aliens) 
shall  be  made  on  or  before  the  fifteenth  day  of  the  third  month  following 
the  close  of  the  fiscal  year,  or,  if  the  return  is  made  on  the  basis  of  the 
calendar  year,  then  the  return  shall  be  made  on  or  before  the  15th  day  of 
March.  In  the  case  of  a  nonresident  alien  individual  returns  shall  be 
made  on  or  before  the  fifteenth  day  of  the  sixth  month  following  the 
close  of  the  fiscal  year,  or,  if  the  return  is  made  on  the  basis  of  the 
calendar  year,  then  the  return  shall  be  made  on  or  before  the  15th  day 
of  June.  The  Commissioner  may  grant  a  reasonable  extension  of  time 
for  filing  returns  whenever  in  his  judgment  good  cause  exists  and  shall 
keep  a  record  of  every  such  extension  and  the  reason  therefor.  Except 
in  the  case  of  taxpayers  who  are  abroad,  no  such  extension  shall  be  for 
more  than  six  months. 

(b)  Returns  shall  be  made  to  the  collector  for  the  district  in  which 
is  located  the  legal  residence  or  principal  place  of  business  of  the  person 
making  the  return,  or,  if  he  has  no  legal  residence  or  principal  place  of 
business  in  the  United  States,  then  to  the  collector  at  Baltimore,  Maryland. 

Understatement  in   Retiu^ns. 

Sec.  228.  That  if  the  collector  or  deputy  collector  has  reason  to  be- 
lieve that  the  amount  of  any  income  returned  is  understated,  he  shall 
give  due  notice  to  the  taxpayer  making  the  return  to  show  cause  why  the 
amount  of  the  return  should  not  be  increased,  and  upon  proof  of  the 
amount  understated,  may  increase  the  same  accordingly.  Such  taxpayer 
may  furnish  sworn  testimony  to  prove  any  relevant  facts  and  if  dis- 
satisfied with  the  decision  of  the  collector  may  appeal  to  the  Commissioner 
for  his  decision,  under  such  rules  of  procedure  as  may  be  prescribed  by 
the  Commissioner  with  the  approval  of  the  Secretary. 

Incorporation  of  Individual  or  Partnership  Business. 

Sec.  229.  That  in  the  case  of  the  organization  as  a  corporation  within 
four  months  after  the  passage  of  this  Act  of  any  trade  or  business  in 
which  capital  is  a  material  income-producing  factor,  and  which  was  pre- 
viously owned  by  a  partnership  or  individual,  the  net  income  of  such  trade 
or  business  from  January  1,  1921,  to  the  date  of  such  organization  may 
at  the  option  of  the  individual  or  partnership  be  taxed  as  the  net  income 
of  a  corporation  is  taxed  under  Titles  II  and  III;  in  which  event  the  net 
income  and  invested  capital  of  such  trade  or  business  shall  be  computed 
as  if  such  corporation  had  been  in  existence  on  and  after  January  1,  1921, 

121 


and  the  undistributed  profits  or  earnings  of  such  trade  or  business  shall 
not  be  subject  to  the  surtaxes  imposed  in  section  211,  but  amounts  dis- 
tributed on  and  after  January  1,  1921,  from  the  earnings  or  profits  of 
such  trade  or  business  accumulated  after  December  31,  1920,  shall  be 
taxed  to  the  recipients  as  dividends ;  and  all  the  provisions  of  Titles  II 
and  III  relating  to  corporations  shall  so  far  as  practicable  apply  to  such 
trade  or  business :  Provided,  That  this  section  shall  not  apply  to  any 
trade  or  business,  the  net  income  of  which  for  the  taxable  year  1921  was 
less  than  20  per  centum  of  its  invested  capital  for  such  year:  Provided 
further.  That  any  taxpayer  who  takes  advantage  of  this  section  shall  pay 
the  tax  imposed  by  section  1000  of  the  Revenue  Act  of  1918  as  if  such 
taxpayer  had  been  a  corporation  on  and  after  January  1,  1921. 

PART  III.— CORPORATIONS. 

Tax   on   Corporations. 

Sec.  230.  That,  in  lieu  of  the  tax  imposed  by  section  230  of  the 
Revenue  Act  of  1918,  there  shall  be  levied,  collected,  and  paid  for  each 
taxable  year  upon  the  net  income  of  every  corporation  a  tax  at  the 
following  rates : 

(a)  For  the  calendar  year  1921,  10  per  centum  of  the  amount  of  the 
net  income  in  excess  of  the  credits  provided  in  section  236;  and 

(b)  For  each  calendar  year  thereafter,  12y2  per  centum  of  such  excess 
amount. 

Conditional   and   Other   Exemptions   of   Corporations. 

Sec.  231.  That  the  following  organizations  shall  be  exempt  from 
taxation  under  this  title  — 

(1)  Labor,  agricultural,  or  horticultural  organizations; 

(2)  Mutual  savings  banks  not  having  a  capital  stock  represented  by 
shares ; 

(3)  Fraternal  beneficiary  societies,  orders,  or  associations,  (a)  oper- 
ating under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members 
of  a  fraternity  itself  operating  under  the  lodge  system;  and  (b)  providing 
for  the  payment  of  life,  sick,  accident,  or  other  benefits  to  the  members  of 
such  society,  order,  or  association  or  their  dependents ; 

(4)  Domestic  building  and  loan  associations  substantially  all  the  busi- 
ness of  which  is  confined  to  making  loans  to  members;  and  co-operative 
banks  without  capital  stock  organized  and  operated  for  mutual  purposes 
and  without  profit ; 

(5)  Cemetery  companies  owned  and  operated  exclusively  for  the 
benefit  of  their  members  or  which  are  not  operated  for  profit ;  and  any 
corporation  chartered  solely  for  burial  purposes  as  a  cemetery  corporation 
and  not  permitted  by  its  charter  to  engage  in  any  business  not  necessarily 
incident  to  that  purpose,  no  part  of  the  net  earnings  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual; 

(6)  Corporations,  and  any  community  chest,  fund,  or  foundation,  or- 
ganized and  operated  exclusively  for  religious,  charitable,  scientific,  liter- 
ary, or  educational  purposes,  or  for  the  prevention  of  cruelty  to  children 
or  animals,  no  part  of  the  net  earnings  of  which  inures  to  the  benefit  of 
any  private  stockholder  or  individual ; 

(7)  Business  leagues,  chambers  of  commerce,  or  boards  of  trade,  not 
organized  for  profit  and  no  part  of  the  net  earnings  of  which  inures  to 
the  benefit  of  any  private  stockholder  or  individual; 

(8)  Civic  leagues  or  organizations  not  organized  for  profit  but  oper- 
ated exclusively  for  the  promotion  of  social  welfare; 

122 


(9)  Clubs  organized  and  operated  exclusively  for  pleasure,  recrea- 
tion, and  other  nonprofitable  purposes,  no  part  of  the  net  earnings  of 
which  inures  to  the  benefit  of  any  private  stockholder  or  member; 

(10)  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance  com- 
panies, mutual  ditch  or  irrigation  companies,  mutual  or  co-operative 
telephone  companies,  or  like  organizations  of  a  purely  local  character,  the 
income  of  which  consists  solely  of  assessments,  dues,  and  fees  collected 
from  members  for  the  sole  purpose  of  meeting  expenses; 

(11)  Farmers',  fruit  growers',  or  like  associations,  organized  and  op- 
erated as  sales  agents  for  the  purpose  of  marketing  the  products  of  mem- 
bers and  turning  back  to  them  the  proceeds  of  sales,  less  the  necessary 
selling  expenses,  on  the  basis  of  the  quantity  of  produce  furnished  by 
them ;  or  organized  and  operated  as  purchasing  agents  for  the  purpose  of 
purchasing  supplies  and  equipment  for  the  use  of  members  and  turning 
over  such  supplies  and  equipment  to  such  members  at  actual  cost,  plus 
necessary  expenses ; 

(12)  Corporations  organized  for  the  exclusive  purpose  of  holding 
title  to  property,  collecting  income  therefrom,  and  turning  over  the  entire 
amount  thereof,  less  expenses,  to  an  organization  which  itself  is  exempt 
from  the  tax  imposed  by  this  title ; 

(13)  Federal  land  banks  and  national  farm  loan  associations  as  pro- 
vided in  section  26  of  the  Act  approved  July  17,  1916,  entitled  "An  Act 
to  provide  capital  for  agricultural  development,  to  create  standard  forms 
of  investment  based  upon  farm  mortgage,  to  equalize  rates  of  interest 
upon  farm  loans,  to  furnish  a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents  for  the  United  States,  and 
for  other  purposes" ; 

(14)  Personal  service  corporations.  This  subdivision  shall  not  be  in 
effect  after  December  31,  1921. 

Net  Income  of  Corporations  Defined. 

Sec.  232.  That  in  the  case  of  a  corporation  subject  to  the  tax  im- 
posed by  section  230  the  term  "net  income''  means  the  gross  income  as 
defined  in  section  233  less  the  deductions  allowed  by  section  234,  and  the 
net  income  shall  be  computed  on  the  same  basis  as  is  provided  in  sub- 
division (b)  of  section  212  or  in  section  226.  In  the  case  of  a  foreign 
corporation  or  of  a  corporation  entitled  to  the  benefits  of  section  262  the 
computation  shall  also  be  made  in  the  manner  provided  in  section  217. 

Gross  Income  of  Corporations  Defined. 

Sec.  233.  (a)  That  in  the  case  of  a  corporation  subject  to  the  tax 
imposed  by  section  230  the  term  "gross  income"  means  the  gross  income 
as  defined  in  sections  213  and  217,  except  that  mutual  marine  insurance 
companies  shall  include  in  gross  income  the  gross  premiums  collected  and 
received  by  them  less  amounts  paid  for  reinsurance. 

(b)  In  the  case  of  a  foreign  corporation,  gross  income  means  only 
gross  income  from  sources  within  the  United  States,  determined  (except 
in  the  case  of  insurance  companies  subject  to  the  tax  imposed  by  section 
243  or  246)  in  the  manner  provided  in  section  217. 

Deductions  Allov/ed  Corporations. 

Sec.  234.  (a)  That  in  computing  the  net  income  of  a  corporation 
subject  to  the  tax  imposed  by  section  230  there  shall  be  allowed  as  de- 
ductions : 

(1)  All  the  ordinary  and  necessary  expenses  paid  or  incurred  during 
the  taxable  year  in  carrying  on  any  trade  or  business,  including  a  reason- 

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able  allowance  for  salaries  or  other  compensation  for  personal  services 
actually  rendered,  and  including  rentals  or  other  payments  required  to  be 
made  as  a  condition  to  the  continued  use  or  possession  of  property  to 
which  the  corporation  has  not  taken  or  is  not  taking  title,  or  in  which  it 
has  no  equity; 

(2)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  in- 
debtedness, except  on  indebtedness  incurred  or  continued  to  purchase  or 
carry  obligations  or  securities  (other  than  obligations  of  the  United  States 
issued  after  September  24,  1917,  and  originally  subscribed  for  by  the  tax- 
payer) the  interest  upon  which  is  wholly  exempt  from  taxation  under  this 
title ; 

(3)  Taxes  paid  or  accrued  within  the  taxable  year  except  (a)  income, 
war-profits,  and  excess-profits  taxes  imposed  by  the  authority  of  the 
United  States,  (b)  so  much  of  the  income,  war-profits  and  excess-profits 
taxes  imposed  by  the  authority  of  any  foreign  country  or  possession  of 
the  United  States  as  is  allowed  as  a  credit  under  section  238,  and  (c) 
taxes  assessed  against  local  benefits  of  a  kind  tending  to  increase  the  value 
of  the  property  assessed.  In  the  case  of  obligors  specified  in  subdivision 
(b)  of  section  221  no  deduction  for  the  payment  of  the  tax  imposed  by 
this  title,  or  any  other  tax  paid  pursuant  to  the  contract  or  provision 
referred  to  in  that  subdivision,  shall  be  allowed,  nor  shall  such  tax  be 
included  in  the  gross  income  of  the  obligee.  The  deduction  allowed  by 
this  paragraph  shall  be  allowed  in  the  case  of  taxes  imposed  upon  a 
shareholder  or  member  of  a  corporation  upon  his  interest  as  shareholder 
or  member,  which  are  paid  by  the  corporation  without  reimbursement 
from  the  shareholder  or  member,  but  in  such  cases  no  deduction  shall  be 
allowed  the  shareholder  or  member  for  the  amount  of  such  taxes.  For 
the  purpose  of  this  paragraph,  estate,  inheritance,  legacy,  and  succession 
taxes  accrue  on  the  due  date  thereof  except  as  otherwise  provided  by  the 
law  of  the  jurisdiction  imposing  such  taxes; 

(4)  Losses  sustained  during  the  taxable  year  and  not  compensated 
for  by  insurance  or  otherwise;  unless,  in  order  to  clearly  reflect  the 
income,  the  loss  should  in  the  opinion  of  the  Commissioner  be  accounted 
for  as  of  a  different  period.  No  deduction  shall  be  allowed  for  any  loss 
claimed  to  have  been  sustained  in  any  sale  or  other  disposition  of  shares 
of  stock  or  securities  made  after  the  passage  of  this  Act  where  it  appears 
that  within  30  days  before  or  after  the  date  of  such  sale  or  other  dispo- 
sition the  taxpayer  has  acquired  (otherwise  than  by  bequest  or  inheri- 
tance) substantially  identical  property,  and  the  property  so  acquired  is 
held  by  the  taxpayer  for  any  period  after  such  sale  or  other  dis- 
position, unless  such  claim  is  made  by  a  dealer  in  stock  or  securities  and 
with  respect  to  a  transaction  made  in  the  ordinary  course  of  its  business. 
If  such  acquisition  is  to  the  extent  of  part  only  of  substantially  identical 
property,  then  only  a  proportionate  part  of  the  loss  shall  be  disallowed. 
In  case  of  losses  arising  from  destruction  of  or  damage  to  property,  where 
the  property  so  destroyed  or  damaged  was  acquired  before  March  1,  1913, 
the  deduction  shall  be  computed  upon  the  basis  of  its  fair  market  price 
or  value  as  of  March  1,  1913; 

(5)  Debts  ascertained  to  be  worthless  and  charged  off  within  the 
taxable  year  (or  in  the  discretion  of  the  Commissioner,  a  reasonable  addi- 
tion to  a  reserve  for  bad  debts)  ;  and  when  satisfied  that  a  debt  is  re- 
coverable only  in  part,  the  Commissioner  may  allow  such  debt  to  be 
charged  off  in  part ; 

(6)  The  amount  received  as  dividends  (a)  from  a  domestic  corpora- 
tion other  than  a  corporation  entitled  to  the  benefits  of  section  262,  or 
(b)  from  any  foreign  corporation  when  it  is  shown  to  the  satisfaction 
of  the  Commissioner  that  more  than  50  per  centum  of  the  gross  income 
of  such  foreign  corporation  for  the  three-year  period  ending  with  the 
close  of  its  taxable  year  preceding  the  declaration  of  such  dividends  (or 
for  such  part  of  such  period  as  the  foreign  corporation  has  been  in  ex- 

124 


istence)  was  derived  from  sources  within  the  United  States  as  determined 
under  section  217; 

(7)  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of 
property  used  in  the  trade  or  business,  including  a  reasonable  allowance 
for  obsolescence.  In  the  case  of  such  property  acquired  before  March  1, 
1913,  this  deduction  shall  be  computed  upon  the  basis  of  its  fair  market 
price  or  value  as  of  March  I,  1913; 

(8)  In  the  case  of  buildings,  machinery,  equipment,  or  other  facilities, 
constructed,  erected,  installed,  or  acquired,  on  or  after  April  6,  1917,  for 
the  production  of  articles  contributing  to  the  prosecution  of  the  war 
against  the  German  Government,  and  in  the  case  of  vessels  constructed 
or  acquired  on  or  after  such  date  for  the  transportation  of  articles  or  men 
contributing  to  the  prosecution  of  such  war,  there  shall  be  allowed,  for 
any  taxable  year  ending  before  March  3,  1924  (if  claim  therefor  was  made 
at  the  time  of  filing  return  for  the  taxable  year  1918,  1919,  1920,  or  1921) 
a  reasonable  deduction  for  the  amortization  of  such  part  of  the  cost  of 
such  facilities  or  vessels  as  has  been  borne  by  the  taxpayer,  but  not  again 
including  any  amount  otherwise  allowed  under  this  title  or  previous  Acts 
of  Congress  as  a  deduction  in  computing  net  income.  At  any  time  before 
March  3,  1924,  the  Commissioner  may,  and  at  the  request  of  the  taxpayer 
shall,  re-examine  the  return,  and  if  he  then  finds  as  a  result  of  an 
appraisal  or  from  other  evidence  that  the  deduction  originally  allowed  was 
incorrect,  the  income,  war-profits,  and  excess-profits  taxes  for  the  year 
or  years  affected  shall  be  redetermined  and  the  amount  of  tax  due  upon 
such  redetermination,  if  any,  shall  be  paid  upon  notice  and  demand  by 
the  collector,  or  the  amount  of  tax  overpaid,  if  any,  shall  be  credited  or 
refunded  to  the  taxpayer  in  accordance  with  the  provisions  of  section  252; 

(9)  In  the  case  of  mines,  oil  and  gas  wells,  other  natural  deposits, 
and  timber,  a  reasonable  allowance  for  depletion  and  for  depreciation  of 
improvements,  according  to  the  peculiar  conditions  in  each  case,  based 
upon  cost  including  cost  of  development  not  otherwise  deducted :  Pro- 
vided, That  in  the  case  of  such  properties  acquired  prior  to  March  1,  1913, 
the  fair  market  value  of  the  property  (or  the  taxpayer's  interest  therein) 
on  that  date  shall  be  taken  in  lieu  of  cost  up  to  that  date :  Provided  fur- 
ther, That  in  the  case  of  mines,  oil  and  gas  wells,  discovered  by  the  tax- 
payer, on  or  after  March  1,  1913,  and  not  acquired  as  a  result  of  purchase 
of  a  proven  tract  or  lease,  where  the  fair  market  value  of  the  property  is 
materially  disproportionate  to  the  cost,  the  depletion  allowance  shall  be 
based  upon  the  fair  market  value  of  the  property  at  the  date  of  the 
discovery,  or  within  thirty  days  thereafter:  And  provided  further.  That 
such  depletion  allowance  based  on  discovery  value  shall  not  exceed  the  net 
income,  computed  without  allowance  for  depletion,  from  the  property  upon 
which  the  discovery  is  made,  except  where  such  net  income  so  computed 
is  less  than  the  depletion  allowance  based  on  cost  or  fair  market  value  as 
of  March  1,  1913;  such  reasonable  allowance  in  all  the  above  cases  to  be 
made  under  rules  and  regulations  to  be  prescribed  by  the  Commissioner 
with  the  approval  of  the  Secretary.  In  the  case  of  leases  the  deductions 
allowed  by  this  paragraph  shall  be  equitably  apportioned  between  the 
lessor  and  lessee ; 

(10)  In  the  case  of  insurance  companies  (other  than  life  insurance 
companies),  in  addition  to  the  above  (unless  otherwise  allowed)  :  (a)  The 
net  addition  required  by  law  to  be  made  within  the  taxable  year  to  reserve 
funds  (including  in  the  case  of  assessment  insurance  companies  the  actual 
deposit  of  sums  with  State  or  Territorial  officers  pursuant  to  law  as 
additions  to  guarantee  or  reserve  funds)  ;  and  (b)  the  sums  other  than 
dividends  paid  within  the  taxable  year  on  policy  and  annuity  contracts. 
After  December  31,  1921,  this  subdivision  shall  apply  only  to  mutual  in- 
surance companies  other  than  life  insurance  companies; 

(11)  In  the  case  of  corporations  (except  those  taxed  under  section 
243)  issuing  policies  covering  life,  health,  and  accident  insurance  combined 

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in  one  policy  issued  on  the  weekly  premium  payment  plan  continuing  for 
life  and  not  subject  to  cancellation,  in  addition  to  the  above,  such  portion 
of  the  net  addition  (not  required  by  law)  made  within  the  taxable  year  to 
reserve  funds  as  the  Commissioner  finds  to  be  required  for  the  protection 
of  the  holders  of  such  policies  only.  This  subdivision  shall  not  be  in 
effect  after  December  31,  1921; 

(12)  In  the  case  of  mutual  marine  insurance  companies,  there  shall 
be  allowed,  in  addition  to  the  deductions  allowed  in  paragraphs  (1)  to 
(10),  inclusive,  and  paragraph  (14),  unless  otherwise  allowed,  amounts 
repaid  to  policyholders  on  account  of  premiums  previously  paid  by  them, 
and  interest  paid  upon  such  amounts  between  the  ascertainment  and  the 
payment  thereof ; 

(13)  In  the  case  of  mutual  insurance  companies  (including  inter- 
insurers  and  recriprocal  underwriters,  but  not  including  mutual  life  or 
mutual  marine  insurance  companies)  requiring  their  members  to  make 
premium  deposits  to  provide  for  losses  and  expenses,  there  shall  be  al- 
lowed, in  addition  to  the  deductions  allowed  in  paragraphs  (1)  to  (10), 
inclusive,  and  paragraph  (14),  unless  otherwise  allowed,  the  amount  of 
premium  deposits  returned  to  their  policyholaers  and  the  amount  of 
premium  deposits  retained  for  the  payment  of  losses,  expenses,  and  re- 
insurance reserves ; 

(14)  If  property  is  compulsorily  or  involuntarily  converted  into  cash 
or  its  equivalent  as  a  result  of  (a)  its  destruction  in  whole  or  in  part, 
(b)  theft  or  seizure,  or  (c)  an  exercise  of  the  power  of  requisition  or 
condemnation,  or  the  threat  or  imminence  thereof ;  and  if  the  taxpayer 
proceeds  forthwith  in  good  faith,  under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary,  to  expend  the  proceeds 
of  such  conversion  in  the  acquisition  of  other  property  of  a  character 
similar  or  related  in  service  or  use  to  the  property  so  converted,  or  in 
the  acquisition  of  80  per  centum  or  more  of  the  stock  or  shares  of  a 
corporation  owning  such  other  property,  or  in  the  establishment  of  a 
replacement  fund,  then  there  shall  be  allowed  as  a  deduction  such  portion 
of  the  gain  derived  as  the  portion  of  the  proceeds  so  expended  bears  to 
the  entire  proceeds.  The  provisions  of  this  paragraph  prescribing  the 
conditions  under  which  a  deduction  may  be  taken  in  respect  of 
the  proceeds  or  gains  derived  from  the  compulsory  or  involuntary  con- 
version of  property  into  cash  or  its  equivalent,  shall  apply  so  far  as  may 
be  practicable  to  the  exemption  or  exclusion  of  such  proceeds  or  gains 
from  gross  income  under  prior  income,  war-profits  and  excess-profits  tax 
Acts. 

(b)  In  the  case  of  a  foreign  corporation  or  of  a  corporation  entitled 
to  the  benefits  of  section  262  the  deductions  allowed  in  subdivision  (a) 
shall  be  allowed  only  if  and  to  the  extent  that  they  are  connected  with 
income  from  sources  within  the  United  States ;  and  the  proper  apportion- 
ment and  allocation  of  the  deductions  with  respect  to  sources  within  and 
without  the  United  States  shall  be  determined  as  provided  in  section  217 
under  rules  and  regulations  prescribed  by  the  Commissioner  with  the 
approval  of  the  Secretary. 

Items    Not    Deductible   by   Corporations, 

Sec.  235.  That  in  computing  net  income  no  deduction  shall  in  any 
case  be  allowed  in  respect  of  any  of  the  items  specified  in  section  215. 

Credits   Allowed  Corporations. 

Sec.  236.  That  for  the  purpose  only  of  the  tax  imposed  by  section 
230  there  shall  be  allowed  the  following  credits : 

(a)  The  amount  received  as  interest  upon  obligations  of  the  United 
States  and  bonds  issued  by  the  War  Finance  Corporation,  which  is  in- 
cluded in  gross  income  under  section  233 ; 

126 


(b)  In  the  case  of  a  domestic  corporation  the  net  income  of  which 
is  $25,000  or  less,  a  specific  credit  of  $2,000;  but  if  the  net  income  is  more 
than  $25,000  the  tax  imposed  by  section  230  shall  not  exceed  the  tax 
which  would  be  payable  if  the  $2,000  credit  were  allowed,  plus  the  amount 
of  the  net  income  in  excess  of  $25,000;  and 

(c)  The  amount  of  any  war-profits  and  excess-profits  taxes  imposed 
by  Act  of  Congress  for  the  same  taxable  year.  The  credit  allowed  by 
this  subdivision  shall  be  determined  as  follows : 

(1)  In  the  case  of  a  corporation  which  makes  return  for  a  fiscal  year 
beginning  in  1920  and  ending  in  1921,  in  computing  the  income  tax  as 
provided  in  subdivision  (a)  of  section  205,  the  portion  of  the  war-profits 
and  excess-profits  tax  computed  for  the  entire  period  under  clause  (1)  of 
subdivision  (a)  of  section  335  shall  be  credited  against  the  net  income 
computed  for  the  entire  period  as  provided  in  clause  (1)  of  subdivision 
(a)  of  section  205,  and  the  portion  of  the  war-profits  and  excess-profits 
tax  computed  for  the  entire  period  under  clause  (2)  of  subdivision  (a) 
of  section  335  shall  be  credited  against  the  net  income  computed  for  the 
entire  period  as  provided  in  clause  (2)  of  subdivision  (a)  of  section  205. 

(2)  In  the  case  of  a  corporation  which  makes  return  for  a  fiscal 
year  beginning  in  1921  and  ending  in  1922,  in  computing  the  income  tax 
as  provided  in  subdivision  (b)  of  section  205,  the  war-profits  and  excess- 
profits  tax  computed  under  subdivision  (b)  of  section  335  shall  be  credited 
against  the  net  income  computed  for  the  entire  period  as  provided  in 
clause  (1)  of  subdivision  (b)   of  section  205. 

Payment  of  Corporation  Income  Tax  at  Source. 

Sec.  237.  That  in  the  case  of  foreign  corporations  subject  to  taxation 
under  this  title  not  engaged  in  trade  or  business  within  the  United  States 
and  not  having  any  office  or  place  of  business  therein,  there  shall  be 
deducted  and  withheld  at  the  source  in  the  same  manner  and  upon  the 
same  items  of  income  as  is  provided  in  section  221  a  tax  equal  to  12y2 
per  centum  thereof  (but  during  the  calendar  year  1921  only  10  per 
centum),  and  such  tax  shall  be  returned  and  paid  in  the  same  manner 
and  subject  to  the  same  conditions  as  provided  in  that  section:  Provided, 
That  in  the  case  of  interest  described  in  subdivision  (b)  of  that  section 
the  deduction  and  withholding  shall  be  at  the  rate  of  2  per  centum. 

Credit  for  Taxes  in  Case  of  Corporations. 

Sec.  238.  (a)  That  in  the  case  of  a  domestic  corporation  the  tax 
imposed  by  this  title,  plus  the  war-profits  and  excess-profits  taxes,  if  any, 
shall  be  credited  with  the  amount  of  any  income,  war-profits,  and  excess- 
profits  taxes  paid  during  the  same  taxable  year  to  any  foreign  country,  or 
to  any  possession  of  the  United  States :  Provided,  That  the  amount  of 
credit  taken  under  this  subdivision  shall  in  no  case  exceed  the  same  pro- 
portion of  the  taxes,  against  which  such  credit  is  taken,  which  the  tax- 
payer's net  income  (computed  without  deduction  for  any  income,  war- 
profits,  and  excess-profits  taxes  imposed  by  any  foreign  country  or  pos- 
session of  the  United  States)  from  sources  without  the  United  States 
bears  to  its  entire  net  income  (computed  without  such  deduction)  for  the 
same  taxable  year.  In  the  case  of  domestic  insurance  companies  subject 
to  the  tax  imposed  by  section  243  or  246,  the  term  "net  income"  as  used 
in  this  subdivision  means  net  income  as  defined  in  sections  245  and  246, 
respectively. 

(b)  If  accrued  taxes  when  paid  differ  from  the  amounts  claimed  as 
credits  by  the  corporation,  or  if  any  tax  paid  is  refunded  in  whole  or  in 
part,  the  corporation  shall  at  once  notify  the  Commissioner,  who  shall  re- 
determine the  amount  of  the  income,  war-profits  and  excess-profits  taxes 
for  the  year  or  years  affected,  and  the  amount  of  taxes  due  upon  such 
redetermination,  if  any,  shall  be  paid  by  the  corporation  upon  notice  and 

127 


demand  by  the  collector,  or  the  amount  of  taxes  overpaid,  if  any,  shall  be 
credited  or  refunded  to  the  corporation  in  accordance  with  the  provisions 
of  section  252.  In  the  case  of  such  a  tax  accrued  but  not  paid,  the  Com- 
missioner as  a  condition  precedent  to  the  allowance  of  this  credit  may 
require  the  corporation  to  give  a  bond  with  sureties  satisfactory  to  and  to 
be  approved  by  him  in  such  penal  sum  as  he  may  require,  conditioned  for 
the  payment  by  the  taxpayer  of  any  amount  of  taxes  found  due  upon  any 
such  redetermination ;  and  the  bond  herein  prescribed  shall  contain  such 
further  conditions  as  the  Commissioner  may  require. 

(c)  These  credits  shall  be  allowed  only  if  the  taxpayer  furnishes 
evidence  satisfactory  to  the  Commissioner  showing  the  amount  of  income 
derived  from  sources  without  the  United  States,  and  all  other  information 
necessary  for  the  verification  and  computation  of  such  credit. 

(d)  If  a  domestic  corporation  makes  a  return  for  a  fiscal  year  begin- 
ning in  1920  and  ending  in  1921,  the  credit  for  the  entire  fiscal  year  shall, 
notwithstanding  any  provision  of  this  Act,  be  determined  under  the  pro- 
visions of  this  section;  and  the  Commissioner  is  authorized  to  disallow, 
in  whole  or  in  part,  any  such  credit  which  he  finds  has  already  been  taken 
by  the  taxpayer. 

(e)  For  the  purposes  of  this  section  a  domestic  corporation  which 
owns  a  majority  of  the  voting  stock  of  a  foreign  corporation  from  which 
it  receives  dividends  (not  deductible  under  section  234)  in  any  taxable 
year  shall  be  deemed  to  have  paid  the  same  proportion  of  any  income, 
war-profits,  or  excess-profits  taxes  paid  by  such  foreign  corporation  to 
any  foreign  country  or  to  any  possession  of  the  United  States,  upon  or 
with  respect  to  the  accumulated  profits  of  such  foreign  corporation  from 
which  such  dividends  were  paid,  which  the  amount  of  such  dividends 
bears  to  the  amount  of  such  accumulated  profits :  Provided,  That  the 
credit  allowed  to  any  domestic  corporation  under  this  subdivision  shall  in 
no  case  exceed  the  same  proportion  of  the  taxes  against  which  it  is 
credited,  which  the  amount  of  such  dividends  bears  to  the  amount  of  the 
entire  net  income  of  the  domestic  corporation  in  which  such  dividends  are 
included.  The  term  "accumulated  profits"  when  used  in  this  subdivision 
in  reference  to  a  foreign  corporation,  means  the  amount  of  its  gains, 
profits,  or  income  in  excess  of  the  income,  war-profits,  and  excess-profits 
taxes  imposed  upon  or  with  respect  to  such  profits  or  income ;  and  the 
Commissioner  with  the  approval  of  the  Secretary  shall  have  full  power 
to  determine  from  the  accumulated  profits  of  what  year  or  years  such 
dividends  were  paid;  treating  dividends  paid  in  the  first  sixty  days  of  any 
year  as  having  been  paid  from  the  accumulated  profits  of  the  preceding 
year  or  years  (unless  to  his  satisfaction  shown  otherwise),  and  in  other 
respects  treating  dividends  as  having  been  paid  from  the  most  recently 
accumulated  gains,  profits,  or  earnings.  In  the  case  of  a  foreign  corpora- 
tion, the  income,  war-profits,  and  excess-profits  taxes  of  which  are  de- 
termined on  the  basis  of  an  accounting  period  of  less  than  one  year,  the 
word  "year"  as  used  in  this  subdivision  shall  be  construed  to  mean  such 
accounting  period. 

(f)  For  the  purposes  of  this  section  a  corporation  entitled  to  the 
benefits  of  section  262  shall  be  treated  as  a  foreign  corporation. 

Corporation   Returns. 

Sec.  239.  (a)  That  every  corporation  subject  to  taxation  under  this 
title  and  every  personal  service  corporation  shall  make  a  return,  stating 
specifically  the  items  of  its  gross  income  and  the  deductions  and  credits 
allowed  by  this  title.  The  return  shall  be  sworn  to  by  the  president,  vice- 
president,  or  other  principal  officer  and  by  the  treasurer  or  assistant  treas- 
urer. If  any  foreign  corporation  has  no  office  or  place  of  business  in  the 
United  States  but  has  an  agent  in  the  United  States,  the  return  shall  be 

128 


made  by  the  agent.  In  cases  where  receivers,  trustees  in  bankruptcy,  or 
assignees  are  operating  the  property  or  business  of  corporations,  such 
receivers,  trustees,  or  assignees  shall  make  returns  for  such  corporations 
ih  the  same  manner  and  form  as  corporations  are  required  to  make  returns. 
Any  tax  due  on  the  basis  of  such  returns  made  by  receivers,  trustees,  or 
assignees  shall  be  collected  in  the  same  manner  as  if  collected  from  the 
corporations  of  whose  business  or  property  they  have  custody  and  control. 

(b)  Returns  made  under  this  section  shall  be  subject  to  the  provisions 
of  sections  226  and  228.  When  return  is  made  under  section  226  the  credit 
provided  in  subdivision  (b)  of  section  236  shall  be  reduced  to  an  amount 
which  bears  the  same  ratio  to  the  full  credit  therein  provided  as  the 
number  of  months  in  the  period  for  which  such  return  is  made  bears  to 
twelve  months. 

(c)  There  shall  be  included  in  the  return  or  appended  thereto  a 
statement  of  such  facts  as  will  enable  the  Commissioner  to  determine  the 
portion  of  the  earnings  or  profits  of  the  corporation  (including  gains, 
profits  and  income  not  taxed)  accumulated  during  the  taxable  year  for 
which  the  return  is  made,  which  have  been  distributed  or  ordered  to  be 
distributed,  respectively,  to  its  stockholders  or  members  during  such  year. 

Consolidated  Returns  of  Corporations. 

Sec.  240.  (a)  That  corporations  which  are  affiliated  within  the  mean- 
ing of  this  section  may,  for  any  taxable  year  beginning  on  or  after 
January  1,  1922,  make  separate  returns  or,  under  regulations  prescribed 
by  the  Commissioner  with  the  approval  of  the  Secretary,  make  a  con- 
solidated return  of  net  income  for  the  purpose  of  this  title,  in  which  case 
the  taxes  thereunder  shall  be  computed  and  determined  upon  the  basis 
of  such  return.  If  return  is  made  on  either  of  such  bases,  all  returns 
thereafter  made  shall  be  upon  the  same  basis  unless  permission  to  change 
the  basis  is  granted  by  the  Commissioner. 

(b)  In  any  case  in  which  a  tax  is  assessed  upon  the  basis  of  a  con- 
solidated return,  the  total  tax  shall  be  computed  in  the  first  instance  as  a 
unit  and  shall  then  be  assessed  upon  the  respective  affiliated  corporations 
in  such  proportions  as  may  be  agreed  upon  among  them,  or,  in  the  absence 
of  any  such  agreement,  then  on  the  basis  of  the  net  income  properly 
assignable  to  each.  There  shall  be  allowed  in  computing  the  income  tax 
only  one  specific  credit  computed  as  provided  in  subdivision  (b)  of  sec- 
tion 236. 

(c)  For  the  purpose  of  this  section  two  or  more  domestic  corpora- 
tions shall  be  deemed  to  be  affiliated  (1)  if  one  corporation  owns  directly 
or  controls  through  closely  affiliated  interests  or  by  a  nominee  or  nomi- 
nees substantially  all  the  stock  of  the  other  or  others,  or  (2)  if  substan- 
tially all  the  stock  of  two  or  more  corporations  is  owned  or  controlled  by 
the  same  interests. 

(d)  For  the  purposes  of  this  section  a  corporation  entitled  to  the 
benefits  of  section  262  shall  be  treated  as  a  foreign  corporation:  Provided, 
That  in  any  case  of  two  or  more  related  trades  or  businesses  (whether 
unincorporated  or  incorporated  and  whether  organized  in  the  United 
States  or  not)  owned  or  controlled  directly  or  indirectly  by  the  same 
interests,  the  Commissioner  may  consolidate  the  accounts  of  such  related 
trades  and  businesses,  in  any  proper  case,  for  the  purpose  of  making  an 
accurate  distribution  or  apportionment  of  gains,  profits,  income,  deduc- 
tions, or  capital  between  or  among  such  related  trades  or  businesses. 

(e)  Corporations  which  are  affiliated  within  the  meaning  of  this  sec- 
tion shall  make  consolidated  returns  for  any  taxable  year  beginning  prior 
to  January  1,  1922,  in  the  same  manner  and  subject  to  the  same  conditions 
as  provided  by  the  Revenue  Act  of  1918. 

129 


Time  and  Place  for  Filing  Corporate  Returns. 

Sec.  241.  (a)  That  returns  of  corporations  shall  be  made  at  the  same 
time  as  is  provided  in  subdivision  (a)  of  section  227,  except  that  in  the 
case  of  foreign  corporations  not  having  any  office  or  place  of  business  in 
the  United  States  returns  shall  be  made  at  the  same  time  as  provided  in 
section  227  in  the  case  of  a  nonresident  alien  individual. 

(b)  Returns  shall  be  made  to  the  collector  of  the  district  in  which  is 
located  the  principal  place  of  business  or  principal  office  or  agency  of  the 
corporation,  or,  if  it  has  no  principal  place  of  business  or  principal  office 
or  agency  in  the  United  States,  then  to  the  collector  at  Baltimore,  Mary- 
land. 

Tax  on  Insurance  Companies. 

Sec.  242.  That  when  used  in  this  title  the  term  "life  insurance  com- 
pany" means  an  insurance  company  engaged  in  the  business  of  issuing 
life  insurance  and  annuity  contracts  (including  contracts  of  combined 
life,  health,  and  accident  insurance),  the  reserve  funds  of  which  held  for 
the  fulfillment  of  such  contracts  comprise  more  than  50  per  centum  of 
its  total  reserve  funds. 

Sec.  243.  That  in  lieu  of  the  taxes  imposed  by  sections  230  and  1000 
and  by  Title  III,  there  shall  be  levied,  collected,  and  paid  for  the  calendar 
year  1921  and  for  each  taxable  year  thereafter  upon  the  net  income  of 
every  life  insurance  company  a  tax  as  follows : 

(1)  In  the  case  of  a  domestic  life  insurance  company,  the  same  per- 
centage of  its  net  income  as  is  imposed  upon  other  corporations  by 
section  230 ; 

(2)  In  the  case  of  a  foreign  life  insurance  company,  the  same  per- 
centage of  its  net  income  from  sources  within  the  United  States  as  is 
imposed  upon  the  net  income  of  other  corporations  by  section  230. 

Sec.  244.  (a)  That  in  the  case  of  a  life  insurance  company  the  term 
"gross  income"  means  the  gross  amount  of  income  received  during  the 
taxable  year  from  interest,  dividends,  and  rents. 

(b)  The  term  "reserve  funds  required  by  law"  includes,  in  the  case 
of  assessment  insurance,  sums  actually  deposited  by  any  company  or 
association  with  State  or  Territorial  officers  pursuant  to  law  as  guaranty 
or  reserve  funds,  and  any  funds  maintained  under  the  charter  or  articles 
of  incorporation  of  the  company  or  association  exclusively  for  the  pay- 
ment of  claims  arising  under  certificates  of  membership  or  policies  issued 
upon  the  assessment  plan  and  not  subject  to  any  other  use. 

Sec.  245.  (a)  That  in  the  case  of  a  life  insurance  company  the  term 
"net  income"  means  the  gross  income  less  — 

(1)  The  amount  of  interest  received  during  the  taxable  year  which 
under  paragraph  (4)  of  subdivision  (b)  of  section  213  is  exempt  from 
taxation  under  this  title; 

(2)  An  amount  equal  to  the  excess,  if  any,  over  the  deduction  speci- 
fied in  paragraph  (1)  of  this  subdivision,  of  4  per  centum  of  the  mean 
of  the  reserve  funds  required  by  law  and  held  at  the  beginning  and  end 
of  the  taxable  year,  plus  (in  case  of  life  insurance  companies  issuing 
policies  covering  life,  health,  and  accident  insurance  combined  in  one 
policy  issued  on  the  weekly  premium  payment  plan,  continuing  for  life 
and  not  subject  to  cancellation)  4  per  centum  of  the  mean  of  such  reserve 
funds  (not  required  by  law)  held  at  the  beginning  and  end  of  the  taxable 
year,  as  the  Commissioner  finds  to  be  necessary  for  the  protection  of  the 
holders  of  such  policies  only; 

(3)  The  amount  received  as  dividends  (a)  from  a  domestic  corpora- 
tion other  than  a  corporation  entitled  to  the  benefits  of  section  262,  or 

130 


(b)  from  any  foreign  corporation  when  it  is  shown  to  the  satisfaction  of 
the  Commissioner  that  more  than  50  per  centum  of  the  gross  income  of 
such  foreign  corporation  for  the  three-year  period  ending  with  the  close 
of  its  taxable  year  preceding  the  declaration  of  such  dividends  (or  for 
such  part  of  such  period  as  the  foreign  corporation  has  been  in  existence) 
was  derived  from  sources  within  the  United  States  as  determined  under 
section  217; 

(4)  An  amount  equal  to  2  per  centum  of  any  sums  held  at  the  end 
of  the  taxable  year  as  a  reserve  for  dividends  (other  than  dividends  pay- 
able during  the  year  following  the  taxable  year)  the  payment  of  which 
is  deferred  for  a  period  of  not  less  than  five  years  from  the  date  of  the 
policy  contract ; 

(5)  Investment  expenses  paid  during  the  taxable  year:  Provided, 
That  if  any  general  expenses  are  in  part  assigned  to  or  included  in  the 
investment  expenses,  the  total  deduction  under  this  paragraph  shall  not 
exceed  one-fourth  of  1  per  centum  of  the  book  value  of  the  mean  of  the 
invested  assets  held  at  the  beginning  and  end  of  the  taxable  year; 

(6)  Taxes  and  other  expenses  paid  during  the  taxable  year  ex- 
clusively upon  or  with  respect  to  the  real  estate  owned  by  the  company, 
not  including  taxes  assessed  against  local  benefits  of  a  kind  tending  to 
increase  the  value  of  the  property  assessed,  and  not  including  any  amount 
paid  out  for  new  buildings,  or  for  permanent  improvements  or  better- 
ments made  to  increase  the  value  of  any  property.  The  deduction  allowed 
by  this  paragraph  shall  be  allowed  in  the  case  of  taxes  imposed  upon  a 
shareholder  or  member  of  a  company  upon  his  interest  as  shareholder  or 
member,  which  are  paid  by  the  company  without  reimbursement  from  the 
shareholder  or  member,  but  in  such  cases  no  deduction  shall  be  allowed 
the  shareholder  or  member  for  the  amount  of  such  taxes ; 

(7)  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of 
property,  including  a  reasonable  allowance  for  obsolescence.  In  the  case 
of  property  acquired  before  March  1,  1913,  this  deduction  shall  be  com- 
puted upon  the  basis  of  its  fair  market  price  or  value  as  of  March  1,  1913; 

(8)  All  interest  paid  or  accrued  within  the  taxable  year  on  its  in- 
debtedness, except  on  indebtedness  incurred  or  continued  to  purchase  or 
carry  obligations  or  securities  (other  than  obligations  of  the  United  States 
issued  after  September  24,  1917,  and  originally  subscribed  for  by  the  tax- 
payer) the  interest  upon  which  is  wholly  exempt  from  taxation  under  this 
title  ; 

(9)  In  the  case  of  a  domestic  life  insurance  company,  the  net  income 
of  which  (computed  without  the  benefit  of  this  paragraph)  is  $25,000  or 
less,  the  sum  of  $2,000;  but  if  the  net  income  is  more  than  $25,000  the 
tax  imposed  by  section  243  shall  not  exceed  the  tax  which  would  be  pay- 
able if  the  $2,000  credit  were  allowed,  plus  the  amount  of  the  net  income 
in  excess  of  $25,000. 

(b)  No  deduction  shall  be  made  under  paragraphs  (6)  and  (7)  of 
subdivision  (a)  on  account  of  any  real  estate  owned  and  occupied  in  whole 
or  in  part  by  a  life  insurance  company  unless  there  is  included  in  the 
return  of  gross  income  the  rental  value  of  the  space  so  occupied.  Such 
rental  value  shall  be  not  less  than  a  sum  which  in  addition  to  any  rents 
received  from  other  tenants  shall  provide  a  net  income  (after  deducting 
taxes,  depreciation,  and  all  other  expenses)  at  the  rate  of  4  per  centum 
per  annum  of  the  book  value  at  the  end  of  the  taxable  year  of  the  real 
estate  so  owned  or  occupied. 

(c)  In  the  case  of  a  foreign  life  insurance  company  the  amount  of 
its  net  income  for  any  taxable  year  from  sources  within  the  United  States 
shall  be  the  same  proportion  of  its  net  income  for  the  taxable  year  from 
sources  within  and  without  the  United  States,  which  the  reserve  funds 
required  by  law  and  held  by  it  at  the  end  of  the  taxable  year  upon  busi- 

131 


ness  transacted  within  the  United  States  is  of  the  reserve  funds  held  by 
it  at  the  end  of  the  taxable  year  upon  all  business  transacted. 

Sec.  246.  (a)  That,  in  lieu  of  the  taxes  imposed  by  sections  230  and 
1000,  there  shall  be  levied,  collected  and  paid  for  the  calendar  year  1922, 
and  for  each  taxable  year  thereafter,  upon  the  net  income  of  every  in- 
surance company  (other  than  a  life  or  mutual  insurance  company)  a  tax 
as  follows : 

(1)  In  the  case  of  such  a  domestic  insurance  company  the  same 
percentage  of  its  net  income  as  is  imposed  upon  other  corporations  by 
section  230; 

(2)  In  the  case  of  such  a  foreign  insurance  company  the  same  per- 
centage of  its  net  income  from  sources  within  the  United  States  as  is 
imposed  upon  the  net  income  of  other  corporations  by  section  230. 

(b)  In  the  case  of  an  insurance  company  subject  to  the  tax  imposed 
by  this  section  — 

(1)  The  term  "gross  income"  means  the  combined  gross  amount, 
earned  during  the  taxable  year,  from  investment  income  and  from  under- 
writing income  as  provided  in  this  subdivision,  computed  on  the  basis  of 
the  underwriting  and  investment  exhibit  of  the  annual  statement  approved 
by  the  National  Convention  of  Insurance  Commissioners; 

(2)  The  term  "net  income"  means  the  gross  income  as  defined  in 
paragraph  (1)  of  this  subdivision  less  the  deductions  allowed  by  section 
247; 

(3)  The  term  "investment  income"  means  the  gross  amount  of  in- 
come earned  during  the  taxable  year  from  interest,  dividends  and  rents, 
computed  as  follows : 

To  all  interest,  dividends  and  rents  received  during  the  taxable  year, 
add  interest,  dividends  and  rents  due  and  accrued  at  the  end  of  the  tax- 
able year,  and  deduct  all  interest,  dividends  and  rents  due  and  accrued  at 
the  end  of  the  preceding  taxable  year; 

(4)  The  term  "underwriting  income"  means  the  premiums  earned  on 
insurance  contracts  during  the  taxable  year  less  losses  incurred  and  ex- 
penses incurred ; 

(5)  The  term  "premiums  earned  on  insurance  contracts  during  the 
taxable  year"  means  an  amount  computed  as  follows : 

From  the  amount  of  gross  premiums  written  on  insurance  contracts 
during  the  taxable  year,  deduct  return  premiums  and  premiums  paid  for 
reinsurance.  To  the  result  so  obtained  add  unearned  premiums  on  out- 
standing business  at  the  end  of  the  preceding  taxable  year  and  deduct 
unearned  premiums  on  outstanding  business  at  the  end  of  the  taxable 
year; 

(6)  The  term  "losses  incurred"  means  losses  incurred  during  the 
taxable  year  on  insurance  contracts,  computed  as  follows : 

To  losses  paid  during  the  taxable  year  add  salvage  and  reinsurance 
recoverable  outstanding  at  the  end  of  the  preceding  taxable  year,  and 
deduct  salvage  and  reinsurance  recoverable  outstanding  at  the  end  of  the 
taxable  year.  To  the  results  so  obtained  add  all  unpaid  losses  outstanding 
at  the  end  of  the  taxable  year  and  deduct  unpaid  losses  outstanding  at 
the  end  of  the  preceding  taxable  year ; 

(7)  The  term  "expenses  incurred"  means  all  expenses  shown  on  the 
annual  statement  approved  by  the  National  Convention  of  Insurance 
Commissioners,  and  shall  be  computed  as  follows : 

To  all  expenses  paid  during  the  taxable  year  add  expenses  unpaid  at 
the  end  of  the  taxable  year  and  deduct  expenses  unpaid  at  the  end  of  the 
preceding  taxable  year.  For  the  purpose  of  computing  the  net  income 
subject  to  the  tax  imposed  by  this  section  there  shall  be  deducted  from 
expenses  incurred  as  defined  in  this  paragraph  all  expenses  incurred 
which  are  not  allowed  as  deductions  by  section  247. 

132 


Sec.  247.  (a)  That  in  computing  the  net  income  of  an  insurance  com- 
pany subject  to  the  tax  imposed  by  section  246  there  shall  be  allowed  as 
deductions : 

(1)  All  ordinary  and  necessary  expenses  incurred,  as  provided  in 
paragraph   (1)    of  subdivision   (a)   of  section  234; 

(2)  All  interest  as  provided  in  paragraph  (2)  of  subdivision  (a)  of 
section  234; 

(3)  Taxes  as  provided  in  paragraph  (3)  of  subdivision  (a)  of  sec- 
tion 234; 

(4)  Losses  incurred ; 

(5)  Bad  debts  in  the  nature  of  agency  balances  and  bills  receivable 
ascertained  to  be  worthless  and  charged  off  within  the  taxable  year; 

(6)  The  amount  received  as  dividends  from  corporations  as  provided 
in  paragraph  (6)  of  subdivision  (a)  of  section  234; 

(7)  The  amount  of  interest  earned  during  the  taxable  year  which 
under  paragraph  (4)  of  subdivision  (b)  of  section  213  is  exempt  from 
taxation  under  this  title,  and  the  amount  of  interest  allowed  as  a  credit 
under  subdivision   (a)   of  section  236; 

(8)  A  reasonable  allowance,  for  the  exhaustion,  wear  and  tear  of 
property,  as  provided  in  paragraph  (7)  of  subdivision  (a)  of  section  234; 

(9)  In  the  case  of  such  a  domestic  insurance  company,  the  net  in- 
come of  which  (computed  without  the  benefit  of  this  paragraph)  is  $25,000 
or  less,  the  sum  of  $2,000;  but  if  the  net  income  is  more  than  $25,000  the 
tax  imposed  by  section  246  shall  not  exceed  the  tax  which  would  be  pay- 
able if  the  $2,000  credit  were  allowed,  plus  the  amount  of  the  net  income 
in  excess  of  $25,000. 

(b)  In  the  case  of  a  foreign  corporation  the  deductions  allowed  in  this 
section  shall  be  allowed  to  the  extent  provided  in  subdivision  (b)  of  sec- 
tion 234. 

(c)  Nothing  in  this  section  or  in  section  246,  shall  be  construed  to 
permit  the  same  item  to  be  twice  deducted. 

PART   IV.— ADMINISTRATIVE   PROVISIONS. 
Payment  of  Taxes. 

Sec.  250.  (a)  That  except  as  otherwise  provided  in  this  section  and 
sections  221  and  237  the  tax  shall  be  paid  in  four  installments,  each  con- 
sisting of  one-fourth  of  the  total  amount  of  the  tax.  The  first  install- 
ment shall  be  paid  at  the  time  fixed  by  law  for  filing  the  return,  and  the 
second  installment  shall  be  paid  on  the  fifteenth  day  of  the  third  month, 
the  third  installment  on  the  fifteenth  day  of  the  sixth  month,  and  the 
fourth  installment  on  the  fifteenth  day  of  the  ninth  month,  after  the  time 
fixed  by  law  for  filing  the  return.  Where  an  extension  of  time  for  filing 
a  return  is  granted  the  time  for  payment  of  the  first  installment  shall  be 
postponed  until  the  date  of  the  expiration  of  the  period  of  the  extension, 
but  the  time  for  payment  of  the  other  installments  shall  not  be  postponed 
unless  the  Commissioner  so  provides  in  granting  the  extension.  In  any 
case  in  which  the  time  for  the  payment  of  any  installment  is  at  the  re- 
quest of  the  taxpayer  thus  postponed,  there  shall  be  added  as  part  of  such 
installment  interest  thereon  at  the  rate  of  one-half  of  1  per  centum  per 
month  from  the  time  it  would  have  been  due  if  no  extension  had  been 
granted,  until  paid.  If  any  installment  is  not  paid  when  due,  the  whole 
amount  of  the  tax  unpaid  shall  become  due  and  payable  upon  notice  and 
demand  by  the  collector. 

The  tax  may  at  the  option  of  the  taxpayer  be  paid  in  a  single  pay- 
ment instead  of  in  installments,  in  which  case  the  total  amount  shall  be 
paid  on  or  before  the  time  fixed  by  law  for  filing  the  return,  or,  where  an 

133 


extension  of  time  for  filing  the  return  has  been  granted,  on  or  before  the 
expiration  of  the  period  of  such  extension. 

(b)  As  soon  as  practicable  after  the  return  is  filed,  the  Commis- 
sioner shall  examine  it.  If  it  then  appears  that  the  correct  amount  of 
the  tax  is  greater  or  less  than  that  shown  in  the  return,  the  installments 
shall  be  recomputed.  If  the  amount  already  paid  exceeds  that  which 
should  have  been  paid  on  the  basis  of  the  installments  as  recomputed,  the 
excess  so  paid  shall  be  credited  against  the  subsequent  installments ;  and 
if  the  amount  already  paid  exceeds  the  correct  amount  of  the  tax,  the 
excess  shall  be  credited  or  refunded  to  the  taxpayer  in  accordance  with 
the  provisions  of  section  252. 

If  the  amount  already  paid  is  less  than  that  which  should  have 
been  paid,  the  difference,  to  the  extent  not  covered  by  any  credits  due  to 
the  taxpayer  under  section  252  (hereinafter  called  "deficiency"),  together 
with  interest  thereon  at  the  rate  of  one-half  of  1  per  centum  per  month 
from  the  time  the  tax  was  due  (or,  if  paid  on  the  installment  basis,  on 
the  deficiency  of  each  installment  from  the  time  the  installment  was  due), 
shall  be  paid  upon  notice  and  demand  by  the  collector.  If  any  part  of  the 
deficiency  is  due  to  negligence  or  intentional  disregard  of  authorized 
rules  and  regulations  with  knowledge  thereof,  but  without  intent  to  de- 
fraud, there  shall  be  added  as  part  of  the  tax  5  per  centum  of  the  total 
amount  of  the  deficiency  in  the  tax,  and  interest  in  such  a  case  shall  be 
collected  at  the  rate  of  1  per  centum  per  month  on  the  amount  of  such 
deficiency  in  the  tax  from  the  time  it  was  due  (or,  if  paid  on  the  install- 
ment basis,  on  the  amount  of  the  deficiency  in  each  installment  from  the 
time  the  installment  was  due),  which  penalty  and  interest  shall  become 
due  and  payable  upon  notice  and  demand  by  the  collector.  If  any  part 
of  the  deficiency  is  due  to  fraud  with  intent  to  evade  tax,  then,  in  lieu  of 
the  penalty  provided  by  section  3176  of  the  Revised  Statutes,  as  amended, 
for  false  or  fraudulent  returns  willfully  made,  but  in  addition  to  other 
penalties  provided  by  law  for  false  or  fraudulent  returns,  there  shall  be 
added  as  part  of  the  tax  50  per  centum  of  the  total  amount  of  the  defi- 
ciency in  the  tax.  In  such  case  the  whole  amount  of  the  tax  unpaid,  in- 
cluding the  penalty  so  added,  shall  become  due  and  payable  upon  notice 
and  demand  by  the  collector. 

(c)  If  the  return  is  made  pursuant  to  section  3176  of  the  Revised 
Statutes  as  amended,  the  amount  of  tax  determined  to  be  due  under  such 
return  shall  be  paid  upon  notice  and  demand  by  the  collector. 

(d)  The  amount  of  income,  excess-profits,  or  war-profits  taxes  due 
under  any  return  made  under  this  Act  for  the  taxable  year  1921  or  succeed- 
ing taxable  years  shall  be  determined  and  assessed  by  the  Commissioner 
within  four  years  after  the  return  was  filed,  and  the  amount  of  any  such 
taxes  due  under  any  return  made  under  this  Act  for  prior  taxable  years 
or  under  prior  income,  excess-profits,  or  war-profits  tax  Acts,  or  under 
section  38  of  the  Act  entitled  "An  Act  to  provide  revenue,  equalize  duties, 
and  encourage  the  industries  of  the  United  States,  and  for  other  pur- 
poses," approved  August  5,  1909,  shall  be  determined  and  assessed  within 
five  years  after  the  return  was  filed,  unless  both  the  Commissioner  and 
the  taxpayer  consent  in  writing  to  a  later  determination,  assessment,  and 
collection  of  the  tax ;  and  no  suit  or  proceeding  for  the  collection  of  any 
such  taxes  due  under  this  Act  or  under  prior  income,  excess-profits,  or 
war-profits  tax  Acts,  or  of  any  taxes  due  under  section  38  of  such  Act 
of  August  5,  1909,  shall  be  begun,  after  the  expiration  of  five  years  after 
the  date  when  such  return  was  filed,  but  this  shall  not  affect  suits  or  pro- 
ceedings begun  at  the  time  of  the  passage  of  this  Act:  Provided.  That 
in  the  case  of  income  received  during  the  lifetime  of  a  decedent,  all 
taxes  due  thereon  shall  be  determined  and  assessed  by  the  Coipmissioner 
within  one  year  after  written  request  therefor  by  the  executor,  admin- 
istrator, or  other  fiduciary  representing  the  estate  of  such  decedent:  Pro- 
vided further,  That  in  the  case  of  a  false  or  fraudulent  return  with  in- 

134 


tent  to  evade  tax,  or  of  a  failure  to  file  a  required  return,  the  amount  of 
tax  due  may  be  determined,  assessed,  and  collected,  and  a  suit  or  proceed- 
ing for  the  collection  of  such  amount  may  be  begun,  at  any  time  after  it 
becomes  due :  Provided  further,  That  in  cases  coming  within  the  scope  of 
paragraph  (9)  of  subdivision  (a)  of  section  214,  or  of  paragraph  (8)  of 
subdivision  (a)  of  section  234,  or  in  cases  of  final  settlement  of  losses  and 
other  deductions  tentatively  allowed  by  the  Commissioner  pending  a  de- 
termination of  the  exact  amount  deductible,  the  amount  of  tax  or  deficiency 
in  tax  due  may  be  determined,  assessed,  and  collected  at  any  time;  but 
prior  to  the  assessment  thereof  the  taxpayer  shall  be  notified  and  given 
a  period  of  not  less  than  thirty  days  in  which  to  file  an  appeal  and  be 
heard  as  hereinafter  provided  in  this  subdivision. 

If  upon  examination  of  a  return  made  under  the  Revenue  Act  of 
1916,  the  Revenue  Act  of  1917,  the  Revenue  Act  of  1918,  or  this  Act,  a 
tax  or  a  deficiency  in  tax  is  discovered,  the  taxpayer  shall  be  notified 
thereof  and  given  a  period  of  not  less  than  thirty  days  after  such  notice 
is  sent  bv  registered  mail  in  which  to  file  an  appeal  and  show  cause  or 
reason  why  the  tax  or  deficiency  should  not  be  paid.  Opportunity  for 
hearing  shall  be  granted  and  a  final  decision  thereon  shall  be  made  as 
quickly  as  practicable.  Any  tax  or  deficiency  in  tax  then  determined  to 
be  due  shall  be  assessed  and  paid,  together  with  the  penalty  and  interest, 
if  any,  applicable  thereto,  within  ten  days  after  notice  and  demand  by 
the  collector  as  hereinafter  provided,  and  in  such  cases  no  claim  in  abate- 
ment of  the  amount  so  assessed  shall  be  entertained :  Provided,  That  in 
cases  where  the  Commissioner  believes  that  the  collection  of  the  amount 
due  will  be  jeopardized  by  such  delay  he  may  make  the  assessment  with- 
out giving  such  notice  or  awaiting  the  conclusion  of  such  hearing. 

(e)  If  any  tax  remains  unpaid  after  the  date  when  it  is  due,  and 
for  ten  days  after  notice  and  demand  by  the  collector,  then,  except  in 
the  case  of  estates  of  insane,  deceased,  or  insolvent  persons,  there  shall 
be  added  as  part  of  the  tax  the  sum  of  5  per  centum  on  the  amount  due 
but  unpaid,  plus  interest  at  the  rate  of  1  per  centum  per  month  upon  such 
amount  from  the  time  it  became  due :  Provided,  That  as  to  any  such 
amount  which  is  the  subject  of  a  bona  fide  claim  for  abatement  filed  within 
ten  days  after  notice  and  demand  by  the  collector,  where  the  taxpayer 
has  not  had  the  benefit  of  the  provisions  of  subdivision  (d),  such  sum  of 
5  per  centum  shall  not  be  added  and  the  interest  from  the  time  the  amount 
was  due  until  the  claim  is  decided  shall  be  at  the  rate  of  one-half  of  1 
per  centum  per  month  on  that  part  of  the  claim  rejected. 

In  the  case  of  the  first  installment  provided  for  in  subdivision  (a) 
the  instructions  printed  on  the  return  shall  be  sufficient  notice  of  the  date 
when  the  tax  is  due  and  sufficient  demand,  and  the  taxpayer's  computa- 
tion of  the  tax  on  the  return  shall  be  sufficient  notice  of  the  amount  due. 
In  the  case  of  each  subsequent  installment  the  collector  may,  within  thirty 
days  and  not  later  than  ten  days  before  the  installment  becomes  due, 
mail  to  the  taxpayer  notice  of  the  amount  of  the  installment  and  the  date 
on  which  it  is  due  for  payment.  Such  notice  of  the  collector  shall  be 
sufficient  notice  and  sufficient  demand  under  this  section. 

(f)  In  the  case  of  any  deficiency  (except  where  the  deficiency  is  due 
to  negligence  or  to  fraud  with  intent  to  evade  tax)  where  it  is  shown  to 
the  satisfaction  of  the  Commissioner  that  the  payment  of  such  deficiency 
would  result  in  undue  hardship  to  the  taxpayer,  the  Commissioner  may, 
with  the  approval  of  the  Secretary,  extend  the  time  for  the  payment  of 
such  deficiency  or  any  part  thereof  for  such  period  not  in  excess  of 
eighteen  months  from  the  passage  of  this  Act  as  the  Commissioner  may 
determine.  In  such  case  the  Commissioner  may  require  the  taxpayer  to 
furnish  a  bond  with  sufficient  sureties  conditioned  upon  the  payment  of 
the  deficiency  in  accordance  with  the  terms  of  the  extension  granted. 
There  shall  be  added  in  lieu  of  other  interest  provided  by  law,  as  a  part 
of   such   deficiency,   interest  thereon  at  the  rate  of   two-thirds  of   1    per 

135 


centum  per  month  from  the  time  such  extension  is  granted ;  except  where 
such  other  interest  provided  by  law  is  in  excess  of  interest  at  the  rate  of 
two-thirds  of  1  per  centum  per  month.  If  the  deficiency  or  any  part 
thereof  is  not  paid  in  accordance  with  the  terms  of  the  extension  granted, 
there  shall  be  added  as  part  of  the  deficiency,  in  lieu  of  other  interest 
and  penalties  provided  by  law,  the  sum  of  5  per  centum  of  the  deficiency 
and  interest  on  the  deficiency  at  the  rate  of  1  per  centum  per  month  from 
the  time  it  becomes  payable  in  accordance  with  the  terms  of  such  exten- 
sion. 

(g)  If  the  Commissioner  finds  that  a  taxpayer  designs  quickly  to 
depart  from  the  United  States  or  to  remove  his  property  therefrom,  or 
to  conceal  himself  or  his  property  therein,  or  to  do  any  other  act  tending 
to  prejudice  or  to  render  wholly  or  partly  ineffectual  proceedings  to 
collect  the  tax  for  the  taxable  year  then  last  past  or  the  taxable  year  then 
current  unless  such  proceedings  be  brought  without  delay,  the  Commis- 
sioner shall  declare  the  taxable  period  for  such  taxpayer  immediately 
terminated  and  shall  cause  notice  of  such  finding  and  declaration  to  be 
given  the  taxpayer,  together  with  a  demand  for  immediate  payment  of 
the  tax  for  the  taxable  period  so  declared  terminated  and  of  the  tax  for 
the  preceding  taxable  year  or  so  much  of  said  tax  as  is  unpaid,  whether 
or  not  the  time  otherwise  allowed  by  law  for  filing  return  and  paying 
the  tax  has  expired ;  and  such  taxes  shall  thereupon  become  immediately 
due  and  payable.  In  any  action  or  suit  brought  to  enforce  payment  of 
taxes  made  due  and  payable  by  virtue  of  the  provisions  of  this  subdivi- 
sion the  finding  of  the  Commissioner,  made  as  herein  provided,  whether 
made  after  notice  to  the  taxpayer  or  not,  shall  be  for  all  purposes  pre- 
sumptive evidence  of  the  taxpayer's  design.  A  taxpayer  who  is  not  in 
default  in  making  any  return  or  paying  income,  war-profits,  or  excess- 
profits  tax  under  any  act  of  Congress  may  furnish  to  the  United  States, 
under  regulations  to  be  prescribed  by  the  Commissioner  with  the  approval 
of  the  Secretary,  security  approved  by  the  Commissioner  that  he  will  duly 
make  the  return  next  thereafter  required  to  be  filed  and  pay  the  tax 
next  thereafter  required  to  be  paid.  The  Commissioner  may  approve  and 
accept  in  like  manner  security  for  return  and  payment  of  taxes  made  due 
and  payable  by  virtue  of  the  provisions  of  this  subdivision,  provided  the 
taxpayer  has  paid  in  full  all  other  income,  war-profits,  or  excess-profits 
taxes  due  from  him  under  any  act  of  Congress.  If  security  is  approved 
and  accepted  pursuant  to  the  provisions  of  this  subdivision  and  such 
further  or  other  security  with  respect  to  the  tax  or  taxes  covered  thereby 
is  given  as  the  Commissioner  shall  from  time  to  time  find  necessary  and 
require,  payment  of  such  taxes  shall  not  be  enforced  by  any  proceedings 
under  the  provisions  of  this  subdivision  prior  to  the  expiration  of  the 
time  otherwise  allowed  for  paying  such  respective  taxes.  In  the  case  of  a 
citizen  of  the  United  States  about  to  depart  from  the  United  States  the 
Commissioner  may,  at  his  discretion,  waive  any  or  all  of  the  requirements 
placed  on  the  taxpayer  by  this  subdivision.  No  alien  shall  depart  from  the 
United  States  unless  he  first  secures  from  the  collector  or  agent  in 
charge  a  certificate  that  he  has  complied  with  all  the  obligations  imposed 
upon  him  by  the  income,  war-profits,  and  excess-profits  tax  laws.  If  a 
taxpayer  violates  or  attempts  to  violate  this  subdivision  there  shall,  in 
addition  to  all  other  penalties,  be  added  as  part  of  the  tax  25  per  centum 
of  the  total  amount  of  the  tax  or  deficiency  in  the  tax,  together  with 
interest  at  the  rate  of  1  per  centum  per  month  from  the  time  the  tax 
became  due. 

(h)  The  provisions  of  subdivisions  (e),  (f)  and  (g)  of  this  section 
shall  apply  to  the  assessment  and  collection  of  taxes  which  have  accrued 
or  may  accrue  under  the  Revenue  Act  of  1917,  the  Revenue  Act  of  1918  or 
this  Act. 


136 


Receipts  for  Taxes. 

Sec.  251.  That  every  collector  to  whom  any  payment  of  any  tax 
is  made  under  the  provisions  of  this  title  shall  upon  request  give  to  the 
person  making  such  payment  a  full  written  or  printed  receipt,  stating  the 
amount  paid  and  the  particular  account  for  which  such  payment  was  made ; 
and  whenever  any  debtor  pays  taxes  on  account  of  payments  made  or  to  be 
made  by  him  to  separate  creditors  the  collector  shall,  if  requested  by  such 
debtor,  give  a  separate  receipt  for  the  tax  paid  on  account  of  each  creditor 
in  such  form  that  the  debtor  can  conveniently  produce  such  receipts  sep- 
arately to  his  several  creditors  in  satisfaction  of  their  respective  demands 
up  to  the  amounts  stated  in  the  receipts  ;  and  such  receipt  shall  be  suffi- 
cient evidence  in  favor  of  such  debtor  to  justify  him  in  withholding  from 
his  next  payment  to  his  creditor  the  amount  therein  stated ;  but  the 
creditor  may,  upon  giving  to  his  debtor  a  full  written  receipt  acknowl- 
edging the  payment  to  him  of  any  sum  actually  paid  and  accepting  the 
amount  of  tax  paid  as  aforesaid  (specifying  the  same)  as  a  further  satis- 
faction of  the  debt  to  that  amount,  require  the  surrender  to  him  of  such 
collector's  receipt. 

Refunds. 

Sec.  252.  That  if,  upon  examination  of  any  return  of  income  made 
pursuant  to  this  Act,  the  Act  of  August  5,  1909,  entitled  "An  Act  to  pro- 
vide revenue,  equalize  duties,  and  encourage  the  industries  of  the  United 
States,  and  for  other  purposes,"  the  Act  of  October  3,  1913,  entitled  "An 
Act  to  reduce  tariff  duties  and  to  provide  revenue  for  the  Government,  and 
for  other  purposes,"  the  Revenue  Act  of  1916,  as  amended,  the  Revenue 
Act  of  1917,  or  the  Revenue  Act  of  1918,  it  appears  that  an  amount  of 
income,  war-profits  or  excess-profits  tax  has  been  paid  in  excess  of  that 
properly  due,  then,  notwithstanding  the  provisions  of  section  3228  of  the 
Revised  Statutes,  the  amount  of  the  excess  shall  be  credited  against  any 
income,  war-profits  or  excess-profits  taxes,  or  installment  thereof,  then 
due  from  the  taxpayer  under  any  other  return,  and  any  balance  of  such 
excess  shall  be  immediately  refunded  to  the  taxpayer :  Provided,  That  no 
such  credit  or  refund  shall  be  allowed  or  made  after  five  years  from  the 
date  when  the  return  was  due,  unless  before  the  expiration  of  such  five 
years  a  claim  therefor  is  filed  by  the  taxpayer :  Provided  further,  That  if 
upon  examination  of  any  return  of  income  made  pursuant  to  the  Revenue 
Act  of  1917,  the  Revenue  Act  of  1918,  or  this  Act,  the  invested  capital 
of  a  taxpayer  is  decreased  by  the  Commissioner,  and  such  decrease  is 
due  to  the  fact  that  the  taxpayer  failed  to  take  adequate  deductions  in 
previous  years,  with  the  result  that  an  amount  of  income  tax  in  excess  of 
that  properly  due  was  paid  in  any  previous  year  or  years,  then,  notwith- 
standing any  other  provision  of  law  and  regardless  of  the  expiration  of 
such  five-year  period,  the  amount  of  such  excess  shall,  without  the  filing 
of  any  claim  therefor,  be  credited  or  refunded  as  provided  in  this  sec- 
tion:  And  provided  further,  That  nothing  in  this  section  shall  be  con- 
strued to  bar  from  allowance  claims  for  refund  filed  prior  to  the  passage 
of  the  Revenue  Act  of  1918  under  subdivision  (a)  of  section  14  of  the 
Revenue  Act  of  1916,  or  filed  prior  to  the  passage  of  this  Act  under  section 
252  of  the  Revenue  Act  of  1918. 

Penalties. 

Sec.  253.  That  any  individual,  corporation,  or  partnership  required 
under  this  title  to  pay  or  collect  any  tax,  to  make  a  return  or  to  supply 
information,  who  fails  to  pay  or  collect  such  tax,  to  make  such  return, 
or  to  supply  such  information  at  the  time  or  times  required  under  this 
title,  shall  be  liable  to  a  penalty  of  not  more  than  $1,000.  Any  individual, 
corporation,  or  partnership,  or  any  officer  or  employee  of  any  corporation 
or  member  or   employee  of  a  partnership,   who   willfully  refuses  to  pay 

137 


or  collect  such  tax,  to  make  such  return,  or  to  supply  such  information 
at  the  time  or  times  required  under  this  title,  or  who  willfully  attempts 
in  any  manner  to  defeat  or  evade  the  tax  imposed  by  this  title,  shall  be 
guilty  of  a  misdemeanor  and  shall  be  fined  not  more  than  $10,000  or  im- 
prisoned for  not  more  than  one  year,  or  both,  together  with  the  costs  of 
prosecution. 

Returns  of    Payments  of  Dividends. 

Sec.  254.  That  every  corporation  subject  to  the  tax  imposed  by  this 
title  and  every  personal  service  corporation  shall,  when  required  by  the 
Commissioner,  render  a  correct  return,  duly  verified  under  oath,  of  its 
payments  of  dividends,  stating  the  name  and  address  of  each  stockholder, 
the  number  of  shares  owned  by  him,  and  the  amount  of  dividends  paid  to 
him. 

Returns    of   Brokers.  ' 

Sec.  255.  That  every  individual,  corporation,  or  partnership  doing 
business  as  a  broker  shall,  when  required  by  the  Commissioner,  render  a 
correct  return  duly  verified  under  oath,  under  such  rules  and  regulations 
as  the  Commissioner,  with  the  approval  of  the  Secretary,  may  prescribe, 
showing  the  names  of  customers  for  whom  such  individual,  corporation, 
or  partnership  has  transacted  any  business,  with  such  details  as  to  the 
profits,  losses,  or  other  information  which  the  Commissioner  may  require, 
as  to  each  of  such  customers,  as  will  enable  the  Commissioner  to  determine 
whether  all  income  tax  due  on  profits  or  gains  of  such  customers  has  been 
paid. 

Information  at  Source. 

Sec.  256.  That  all  individuals,  corporations,  and  partnerships,  in 
whatever  capacity  acting,  including  lessees  or  mortgagors  of  real  or  per- 
sonal property,  fiduciaries,  and  employers,  making  payment  to  another  in- 
dividual, corporation,  or  partnership,  of  interest,  rent,  salaries,  wages,  pre- 
miums, annuities,  compensations,  remunerations,  emoluments,  or  other 
fixed  or  determinable  gains,  profits,  and  income  (other  than  payments 
described  in  sections  254  and  255),  of  $1,000  or  more  in  any  taxable  year, 
or,  in  the  case  of  such  payments  made  by  the  United  States,  the  officers 
or  employees  of  the  United  States  having  information  as  to  such  payments 
and  required  to  make  returns  in  regard  thereto  by  the  regulations  herein- 
after provided  for,  shall  render  a  true  and  accurate  return  to  the  Com- 
missioner, under  such  regulations  and  in  such  form  and  manner  and  to 
such  extent  as  may  be  prescribed  by  him  with  the  approval  of  the  Secre- 
tary, setting  forth  the  amount  of  such  gains,  profits,  and  income,  and  the 
name  and  address  of  the  recipient  of  such  payment. 

Such  returns  may  be  required,  regardless  of  amounts,  (1)  in  the  case 
of  payments  of  interest  upon  bonds,  mortgages,  deeds  of  trust,  or  other 
similar  obligations  of  corporations,  and  (2)  in  the  case  of  collections  of 
items  (not  payable  in  the  United  States)  of  interest  upon  the  bonds  of 
foreign  countries  and  interest  upon  the  bonds  of  and  dividends  from 
foreign  corporations  by  individuals,  corporations,  or  partnerships,  under- 
taking as  a  matter  of  business  or  for  profit  the  collection  of  foreign  pay- 
ments of  such  interest  or  dividends  by  means  of  coupons,  checks,  or  bills 
of  exchange. 

When  necessary  to  make  effective  the  provisions  of  this  section  the 
name  and  address  of  the  recipient  of  income  shall  be  furnished  upon  de- 
mand of  the  individual,  corporation,  or  partnership  paying  the  income. 

The  provisions  of  this  section  shall  applv  to  the  calendar  year  1921 
and  each  calendar  vear  thereafter,  but  shall  not  apply  to  the  payment  of 
interest  on  obligations  of  the  United  States. 


138 


Returns   to   be    Public    Records. 

Sec.  257.  That  returns  upon  which  the  tax  has  been  determined  by 
the  Commissioner  shall  constitute  public  records ;  but  they  shall  be  open 
to  inspection  only  upon  order  of  the  President  and  under  rules  and  regu- 
lations prescribed  by  the  Secretary  and  approved  by  the  President :  Pro- 
vided, That  the  proper  officers  of  any  State  imposing  an  income  tax  may, 
upon  the  request  of  the  governor  thereof,  have  access  to  the  returns  of 
any  corporation,  or  to  an  abstract  thereof  showing  the  name  and  income 
of  the  corporation,  at  such  times  and  in  such  manner  as  the  Secretary 
may  prescribe:  Proznded  further.  That  all  bona  fide  stockholders  of  rec- 
ord owning  1  per  centum  or  more  of  the  outstanding  stock  of  any  cor- 
poration shall,  upon  making  request  of  the  Commissioner,  be  allowed  to 
examine  the  annual  income  returns  of  such  corporation  and  of  its  sub- 
sidiaries. Any  stockholder  who  pursuant  to  the  provisions  of  this  section 
is  allowed  to  examine  the  return  of  any  corporation,  and  who  makes 
known  in  any  manner  whatever  not  provided  by  law  the  amount  or  source 
of  income,  profits,  losses,  expenditures,  or  any  particular  thereof,  set 
forth  or  disclosed  in  any  such  return,  shall  be  guilty  of  a  misdemeanor 
and  be  punished  by  a  fine  not  exceeding  $1,000,  or  by  imprisonment  not 
exceeding  one  year,  or  both. 

The  Commissioner  shall  as  soon  as  practicable  in  each  year  cause  to 
be  prepared  and  made  available  to  public  inspection  in  such  manner  as  he 
may  determine,  in  the  office  of  the  collector  in  each  internal-revenue  dis- 
trict and  in  such  other  places  as  he  may  determine,  lists  containing  the 
names  and  the  post-office  addresses  of  all  individuals  making  income-tax 
returns  in  such  district. 

Publication    of    Statistics. 

Sec.  258.  That  the  Commissioner,  with  the  approval  of  the  Secretary, 
shall  prepare  and  publish  annually  statistics  reasonably  available  with  re- 
spect to  the  operation  of  the  income,  war-profits  and  excess-profits  tax 
laws,  including  classifications  of  taxpayers  and  of  income,  the  amounts 
allowed  as  deductions,  exemptions,  and  credits,  and  any  other  facts  deemed 
pertinent  and  valuable. 

Collection  of  Foreign  Items. 

Sec.  259.  That  all  individuals,  corporations,  or  partnerships  under- 
taking as  a  matter  of  business  or  for  profit  the  collection  of  foreign  pay- 
ments of  interest  or  dividends  by  means  of  coupons,  checks,  or  bills  of 
exchange  shall  obtain  a  license  from  the  Commissioner  and  shall  be  sub- 
ject to  such  regulations  enabling  the  Government  to  obtain  the  informa- 
tion required  under  this  title  as  the  Commissioner,  with  the  approval  of 
the  Secretary,  shall  prescribe ;  and  whoever  knowingly  undertakes  to  col- 
lect such  payments  without  having  obtained  a  license  therefor,  or  without 
complying  with  such  regulations,  shall  be  guilty  of  a  misdemeanor  and 
shall  be  fined  not  more  than  $5,000,  or  imprisoned  for  not  more  than  one 
year,  or  both. 

Citizens   of   Possessions   of  the   United    States. 

Sec.  260.  That  any  individual  who  is  a  citizen  of  any  possession  of 
the  United  States  (but  not  otherwise  a  citizen  of  the  United  States)  and 
who  is  not  a  resident  of  the  United  States,  shall  be  subject  to  taxation 
under  this  title  only  as  to  income  derived  from  sources  within  the  United 
States,  and  in  such  case  the  tax  shall  be  computed  and  paid  in  the  same 
manner  and  subject  to  the  same  conditions  as  in  the  case  of  other  persons 
who  are  taxable  only  as  to  income  derived  from  such  sources. 

Nothing  in  this  section  shall  be  construed  to  alter  or  amend  the  pro- 
visions of  the  Act  entitled  "An  Act  making  appropriations  for  the  naval 

139 


service  for  the  fiscal  year  ending  June  30,  1922,  and  for  other  purposes," 
approved  July  12,  1921,  relating  to  the  imposition  of  income  taxes  in  the 
Virgin  Islands  of  the  United  States. 

Porto  Rico  and  Philippine  Islands. 

Sec.  261.  That  in  Porto  Rico  and  the  Philippine  Islands  the  income 
tax  shall  be  levied,  assessed,  collected,  and  paid  as  provided  by  law  prior 
to  the  passage  of  this  Act. 

The  Porto  Rican  or  Philippine  Legislature  shall  have  power  by  due 
enactment  to  amend,  alter,  modify,  or  repeal  the  income  tax  laws  in  force 
in  Porto  Rico  or  the  Philippine  Islands,  respectively. 

Income  From  Sources  Within  the  Possessions  of  the  United  States. 

Sec.  262.  (a)  That  in  the  case  of  citizens  of  the  United  States  or 
domestic  corporations,  satisfying  the  following  conditions,  gross  income 
means  only  gross  income  from  sources  within  the  United  States — 

(1)  If  80  per  centum  or  more  of  the  gross  income  of  such  citizen  or 
domestic  corporation  (computed  without  the  benefit  of  this  section)  for 
the  three-year  period  immediately  preceding  the  close  of  the  taxable  year 
(or  for  such  part  of  such  period  immediately  preceding  the  close  of  such 
taxable  year  as  may  be  applicable)  was  derived  from  sources  within  a 
possession  of  the  United  States ;  and 

(2)  If,  in  the  case  of  such  corporation,  50  per  centum  or  more  of  its 
gross  income  (computed  without  the  benefit  of  this  section)  for  such  period 
or  such  part  thereof  was  derived  from  the  active  conduct  of  a  trade  or 
business  within  a  possession  of  the  United  States ;  or 

(3)  If,  in  the  case  of  such  citizen,  50  per  centum  or  more  of  his  gross 
income  (computed  without  the  benefit  of  this  section)  for  such  period  or 
such  part  thereof  was  derived  from  the  active  conduct  of  a  trade  or 
business  within  a  possession  of  the  United  States  either  on  his  own  ac- 
count or  as  an  employee  or  agent  of  another. 

(b)  Notwithstanding  the  provisions  of  subdivision  (a)  there  shall  be 
included  in  gross  income  all  amounts  received  by  such  citizens  or  cor- 
porations within  the  United  States,  whether  derived  from  sources  within 
or  without  the  United  States. 

(c)  As  used  in  this  section  the  term  "possession  of  the  United  States" 
does  not  include  the  Virgin  Islands  of  the  United  States. 

Effective  Date  of  Title. 

Sec.  263.     That  this  title  shall  take  eflfect  as  of  January  1,  1921. 

TITLE    III.  — WAR-PROFITS    AND    EXCESS-PROFITS    TAX 

FOR  192L 

PART  L  — GENERAL  DEFINITIONS. 

Sec.  300.  That  when  used  in  this  title  the  terms  "taxable  year," 
"fiscal  year,"  "personal  service  corporation,"  "paid  or  accrued,"  and  "divi- 
dends" shall  have  the  same  meaning  as  provided  for  the  purposes  of  in- 
come tax  in  sections  200  and  201. 

PART  II.  — IMPOSITION  OF  TAX. 

Sec.  301.  (a)  That  in  lieu  of  the  tax  imposed  by  Title  III  of  the 
Revenue  Act  of  1918,  but  in  addition  to  the  other  taxes  imposed  by  this 
Act,  there  shall  be  levied,  collected  and  paid  for  the  calendar  year  1921 

140 


upon  the  net  income  of  every  corporation  (except  corporations  taxable 
under  subdivision  (b)  of  this  section)  a  tax  equal  to  the  sum  of  the 
following : 

First  Bracket. 

20  per  centum  of  the  amount  of  the  net  income  in  excess  of  the  excess- 
profits  credit  (determined  under  section  312)  and  not  in  excess  of  20  per 
centum  of  the  invested  capital; 

Second  Bracket. 

40  per  centum  of  the  amount  of  the  net  income  in  excess  of  20  per 
centum  of  the  invested  capital. 

(b)  For  the  calendar  year  1921  there  shall  be  levied,  collected,  and 
paid  upon  the  net  income  of  every  corporation  which  derives  in  such  year 
a  net  income  of  more  than  $10,000  from  any  Government  contract  or  con- 
tracts made  between  April  6,  1917,  and  November  11,  1918,  both  dates 
inclusive,  a  tax  equal  to  the  sum  of  the  following: 

(1)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in  sub- 
division (a)  of  section  301  of  the  Revenue  Act  of  1918,  as  the  part  of 
the  net  income  attributable  to  such  Government  contract  or  contracts  bears 
to  the  entire  net  income.  In  computing  such  tax  the  excess-profits  credit 
and  the  war-profits  credit  which  would  be  applicable  to  such  calendar 
year  under  the  Revenue  Act  of  1918  if  it  had  been  continued  in  force, 
shall  be  used ; 

(2)  Such  a  portion  of  a  tax  computed  at  the  rates  specified  in  sub- 
division (a)  of  this  section  as  the  part  of  the  net  income  not  attribut- 
able to  such  Government  contract  or  contracts  bears  to  the  entire  net 
income. 

For  the  purpose  of  determining  the  part  of  the  net  income  attributable 
to  such  Government  contract  or  contracts,  the  proper  apportionment  and 
allocation  of  the  deductions  with  respect  to  gross  income  derived  from 
such  Government  contract  or  contracts  and  from  other  sources,  respect- 
ively, shall  be  determined  under  rules  and  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary. 

(c)  In  any  case  where  the  full  amount  of  the  excess-profits  credit  is 
not  allowed  under  the  first  bracket  of  subdivision  (a),  by  reason  of  the 
fact  that  such  credit  is  in  excess  of  20  per  centum  of  the  invested  capital, 
the  part  not  so  allowed  shall  be  deducted  from  the  amount  in  the  second 
bracket. 

Sec.  302.  That  the  tax  imposed  by  subdivision  (a)  of  section  301 
shall  in  no  case  be  more  than  20  per  centum  of  the  amount  of  the  net 
income  in  excess  of  $3,000  and  not  in  excess  of  $20,000,  plus  40  per  centum 
of  the  amount  of  the  net  income  in  excess  of  $20,000;  and  the  limitations 
imposed  by  section  302  of  the  Revenue  Act  of  1918  (upon  taxes  computed 
under  subdivision  (c)  of  section  301  of  that  Act)  are  hereby  made  applic- 
able to  taxes  computed  under  subdivision  (b)  of  section  301  of  this  Act. 
Nothing  in  this  section  shall  be  construed  in  such  manner  as  to  increase  the 
tax  imposed  by  section  301  of  this  Act. 

Sec.  303.  That  if  part  of  the  net  income  of  a  corporation  is  derived 
(1)  from  a  trade  or  business  (or  a  branch  of  a  trade  or  business)  in 
which  the  employment  of  capital  is  necessary,  and  (2)  a  part  (constitut- 
ing not  less  than  30  per  centum  of  its  total  net  income)  is  derived  from 
a  separate  trade  or  business  (or  a  distinctly  separate  branch  of  the  trade 
or  business)  which  if  constituting  the  sole  trade  or  business  would  bring 
it  within  the  class  of  "personal  service  corporations,"  then  (under  regu- 
lations prescribed  by  the  Commissioner  with  the  approval  of  the  Secre- 
tary)   the  tax  upon  the  first  part  of  such  net  income  shall  be  separately 

141 


computed  (allowing  in  such  computation  only  the  same  proportionate  part 
of  the  credits  authorized  in  section  312),  and  the  tax  upon  the  second  part 
shall  be  the  same  percentage  thereof  as  the  tax  so  computed  upon  the 
first  part  is  of  such  first  part:  Proinded,  That  the  tax  upon  such  second 
part  shall  in  no  case  be  less  than  20  per  centum  thereof,  unless  the  tax 
upon  the  entire  net  income,  if  computed  without  benefit  of  this  section, 
would  constitute  less  than  20  per  centum  of  such  entire  net  income,  in 
which  event  the  tax  shall  be  determined  upon  the  entire  net  income,  with- 
out reference  to  this  section,  as  other  taxes  are  determined  under  this 
title.  The  total  tax  computed  under  this  section  shall  be  subject  to  tiie 
limitations  provided  in  section  302. 

Sec.  304.  (a)  That  the  corporations  enumerated  in  section  231  shall, 
to  the  extent  that  they  are  exempt  from  income  tax  under  Title  II,  be  ex- 
empt from  taxation  under  this  title. 

(b)  Any  corporation  whose  net  income  for  the  taxable  year  is  less 
than  $3,000  shall  be  exempt  from  taxation  under  this  title. 

(c)  In  the  case  of  any  corporation  engaged  in  the  mining  of  gold, 
the  portion  of  the  net  income  derived  from  the  mining  of  gold  shall  be 
exempt  from  the  tax  imposed  by  this  title  or  any  tax  imposed  by  Title  II 
of  the  Revenue  Act  of  1917,  and  the  tax  on  the  remaining  portion  of  the 
net  income  shall  be  the  same  proportion  of  a  tax  computed  without  the 
benefit  of  this  subdivision  which  such  remaining  portion  of  the  net  in- 
come bears  to  the  entire  net  income. 

Sec.  305.  That  if  a  tax  is  computed  under  this  title  for  a  period  of 
less  than  twelve  months,  the  specific  exemption  of  $3,000,  wherever  referred 
to  in  this  title,  shall  be  reduced  to  an  amount  which  is  the  same  proportion 
of  $3,000  as  the  number  of  months  in  the  period  is  of  twelve  months. 

PART    III.  — EXCESS-PROFITS    CREDIT. 

Sec.  312.  That  the  excess-profits  credit  shall  consist  of  a  specific 
exemption  of  $3,000  plus  an  amount  equal  to  8  per  centum  of  the  invested 
capital  for  the  taxable  year. 

A  foreign  corporation  or  a  corporation  entitled  to  the  benefits  of  sec- 
tion 262  shall  not  be  entitled  to  the  specific  exemption  of  $3,000. 

PART  IV.  — NET  INCOME. 

Sec.  320.  That  for  the  purpose  of  this  title  the  net  income  of  a 
corporation  shall  be  ascertained  and  returned  for  the  taxable  year  upon 
the  same  basis  and  in  the  same  manner  as  provided  for  income  tax  pur- 
poses in  Title  II  of  this  Act. 

PART  v.  — INVESTED   CAPITAL. 

Sec.  325.     (a)   That  as  used  in  this  title — 

The  term  "intangible  property"  means  patents,  copyrights,  secret  proc- 
esses and  formulae,  good  will,  trade-marks,  trade-brands,  franchises,  and 
other  like  property; 

The  term  "tangible  property"  means  stocks,  bonds,  notes,  and  other 
evidences  of  indebtedness,  bills  and  accounts  receivable,  leaseholds,  and 
other  property  other  than   intangible  property; 

The  term  "borrowed  capital"  means  money  or  other  property  bor- 
rowed, whether  represented  by  bonds,  notes,  open  accounts,  or  otherwise ; 

The  terra  "inadmissible  assets"  means  stocks,  bonds,  and  other  obliga- 
tions (other  than  obligations  of  the  United  States),  the  dividends  or  in- 
terest from  which  is  not  included  in  computing  net  income,  but  where  the 
income  derived  from  such  assets  consists  in  part  of  gain  or  profit  derived 

142 


from  the  sale  or  other  disposition  thereof,  or  where  all  or  part  of  the 
interest  derived  from  such  assets  is  in  effect  included  in  the  net  income 
because  of  the  limitation  on  the  deduction  of  interest  under  paragraph 
(2)  of  subdivision  (a)  of  section  234,  a  corresponding  part  of  the  capital 
invested  in  such  assets  shall  not  be  deemed  to  be  inadmissible  assets ; 

The  term  "admissible  assets"  means  all  assets  other  than  inadmissible 
assets,  valued  in  accordance  with  the  provisions  of  subdivision  (a)  of 
section  326  and  section  331. 

(b)  For  the  purposes  of  this  title  the  par  value  of  stock  or  shares 
shall,  in  the  case  of  stock  or  shares  issued  at  a  nominal  value  or  having 
no  par  value,  be  deemed  to  be  the  fair  market  value  as  of  the  date  or 
dates  of  issue  of  such  stock  or  shares. 

Sec.  326.  (a)  That  as  used  in  this  title  the  term  "invested  capital" 
for  anv  year  means  (except  as  provided  in  subdivisions  (b)  and  (c)  of 
this  section)  : 

(1)  Actual  cash  bona  fide  paid  in  for  stock  or  shares; 

(2)  Actual  cash  value  of  tangible  property,  other  than  cash,  bona 
fide  paid  in  for  stock  or  shares,  at  the  time  of  such  payment,  but  in  no 
case  to  exceed  the  par  value  of  the  original  stock  or  shares  specifically 
issued  therefor,  unless  the  actual  cash  value  of  such  tangible  property  at 
the  time  paid  in  is  shown  to  the  satisfaction  of  the  Commissioner  to  have 
been  clearly  and  substantially  in  excess  of  such  par  value,  in  which  case 
such  excess  shall  be  treated  as  paid-in  surplus :  Provided,  That  the  Com- 
missioner shall  keep  a  record  of  all  cases  in  which  tangible  property  is 
included  in  invested  capital  at  a  value  in  excess  of  the  stock  or  shares 
issued  therefor,  containing  the  name  and  address  of  each  taxpayer,  the 
business  in  which  engaged,  the  amount  of  invested  capital  and  net  income 
shown  by  the  return,  the  value  of  the  tangible  property  at  the  time  paid 
in,  the  par  value  of  the  stock  or  shares  specifically  issued  therefor,  and  the 
amount  included  under  this  paragraph  as  paid-in  surplus.  The  Com- 
missioner shall  furnish  a  copy  of  such  record  and  other  detailed  informa- 
tion with  respect  to  such  cases  when  required  by  resolution  of  either 
House  of  Congress,  without  regard  to  the  restrictions  contained  in  section 
257; 

(3)  Paid-in  or  earned  surplus  and  undivided  profits;  not  including 
surplus  and  undivided  profits  earned  during  the  year ; 

(4)  Intangible  property  bona  fide  paid  in  for  stock  or  shares  prior 
to  March  3,  1917,  in  an  amount  not  exceeding  (a)  the  actual  cash  value  of 
such  property  at  the  time  paid  in,  (b)  the  par  value  of  the  stock  or  shares 
issued  therefor,  or  (c)  in  the  aggregate  25  per  centum  of  the  par  value 
of  the  total  stock  or  shares  of  the  corporation  outstanding  on  March  3. 
1917,  whichever  is  lowest; 

(5)  Intangible  property  bona  fide  paid  in  for  stock  or  shares  on  or 
after  March  3.  1917,  in  an  amount  not  exceeding  (a)  the  actual  cash 
value  of  such  property  at  the  time  paid  in,  (b)  the  par  value  of  the  stock 
or  shares  issued  therefor,  or  (c)  in  the  aggregate  25  per  centum  of  the 
par  value  of  the  total  stock  or  shares  of  the  corporation  outstanding  at 
the  beginning  of  the  taxable  year,  whichever  is  lowest:  Provided,  That 
in  no  case  shall  the  total  amount  included  under  paragraphs  (4)  and  (5) 
exceed  in  the  aggregate  25  per  centum  of  the  par  value  of  the  total  stock 
or  shares  of  the  corporation  outstanding  at  the  beginning  of  the  taxable 
year;  but 

(b)  As  used  in  this  title  the  term  "invested  capital"  does  not  include 
borrowed  capital. 

(c)  There  shall  be  deducted  from  invested  capital  as  above  defined 
a  percentage  thereof  equal  to  the  percentage  which  the  amount  of  in- 
admissible assets  is  of  the  amount  of  admissible  and  inadmissible  assets 
held  during  the  taxable  year. 

143 


(d)  The  invested  capital  for  any  period  shall  be  the  average  invested 
capital  for  such  period,  but  in  the  case  of  a  corporation  making  a  return 
for  a  fractional  part  of  a  year,  it  shall  be  the  same  fractional  part  of 
such  average  invested  capital. 

Sec.  327.  That  in  the  following  cases  the  tax  shall  be  determined 
as  provided  in  section  328 : 

(a)  Where  the  Commissioner  is  unable  to  determine  the  invested 
capital  as  provided  in  section  326; 

(b)  In  the  case  of  a  foreign  corporation  or  of  a  corporation  entitled 
to  the  benefits  of  section  262 ; 

(c)  Where  a  mixed  aggregate  of  tangible  property  and  intangible 
property  has  been  paid  in  for  stock  or  for  stock  and  bonds  and  the 
Commissioner  is  unable  satisfactorily  to  determine  the  respective  values 
of  the  several  classes  of  property  at  the  time  of  payment,  or  to  distinguish 
the  classes  of  property  paid  in  for  stock  and  for  bonds,  respectively; 

(d)  Where  upon  application  by  the  corporation  the  Commissioner 
finds  and  so  declares  of  record  that  the  tax  if  determined  without  benefit 
of  this  section  would,  owing  to  abnormal  conditions  affecting  the  capital 
or  income  of  the  corporation,  work  upon  the  corporation  an  exceptional 
hardship  evidenced  by  gross  disproportion  between  the  tax  computed 
without  benefit  of  this  section  and  the  tax  computed  by  reference  to  the 
representative  corporations  specified  in  section  328.  This  subdivision 
shall  not  apply  to  any  case  (1)  in  which  the  tax  (computed  without 
benefit  of  this  section)  is  high  merely  because  the  corporation  earned 
within  the  taxable  year  a  high  rate  of  profit  upon  a  normal  invested 
capital,  nor  (2)  in  which  50  per  centum  or  more  of  the  gross  income 
of  the  corporation  for  the  taxable  year  (computed  under  section  233  of 
Title  II)  consists  of  gains,  profits,  commissions,  or  other  income,  derived 
on  a  cost-plus  basis  from  a  Government  contract  or  contracts  made 
between  April  6.  1917,  and  November  11,  1918,  both  dates  inclusive. 

Sec.  328.  (a)  That  in  the  cases  specified  in  section  327  the  tax  shall 
be  the  amount  which  bears  the  same  ratio  to  the  net  income  of  the  taxpayer 
(in  excess  of  the  specific  exemption  of  $3,000)  for  the  taxable  year, 
as  the  average  tax  of  representative  corporations  engaged  in  a  like  or 
similar  trade  or  business,  bears  to  their  average  net  income  (in  excess  of 
the  specific  exemption  of  $3,000)  for  such  year.  In  the  case  of  a  foreign 
corporation  or  of  a  corporation  entitled  to  the  benefits  of  section  262 
the  tax  shall  be  computed  without  deducting  the  specific  exemption  of 
$3,000  either  for  the  taxpayer  or  the  representative  corporations. 

In  computing  the  tax  under  this  section  the  Commissioner  shall 
compare  the  taxpayer  only  with  representative  corporations  whose  invested 
capital  can  be  satisfactorily  determined  under  section  326  and  which  are, 
as  nearly  as  may  be,  similarly  circumstanced  with  respect  to  gross  income, 
net  income,  profits  per  unit  of  business  transacted  and  capital  employed,  the 
amount  and  rate  of  war  profits  or  excess  profits,  and  all  other  relevant 
facts  and  circumstances. 

(b)  For  the  purposes  of  subdivision  (a)  the  ratios  between  the 
average  tax  and  the  average  net  income  of  representative  corporations 
shall  be  determined  by  the  Commissioner  in  accordance  with  regulations 
prescribed  by  him  with  the  approval  of  the  Secretary. 

(c)  The  Commissioner  shall  keep  a  record  of  all  cases  in  which  the 
tax  is  determined  in  the  manner  prescribed  in  subdivision  (a),  containing 
the  name  and  address  of  each  taxpayer,  the  business  in  which  engaged, 
the  amount  of  invested  capital  and  net  income  shown  by  the  return,  and 
the  amount  of  invested  capital  as  determined  under  such  subdivision.  The 
Commissioner   shall   furnish  a   copy   of   such   record   and  other   detailed 

144 


information  with  respect  to  such  cases  when  required  by  resolution  of 
either  House  of  Congress,  without  regard  to  the  restrictions  contained 
in  section  257. 

PART  VI.  — REORGANIZATIONS. 

Sec.  331.  That  in  the  case  of  the  reorganization,  consolidation,  or 
change  of  ownership  of  a  trade  or  business,  or  change  of  ownership  of 
property,  after  March  3,  1917,  if  an  interest  or  control  in  such  trade  or 
business  or  property  of  50  per  centum  or  more  remains  in  the  same 
persons,  or  any  of  them,  then  no  asset  transferred  or  received  from 
the  previous  owner  shall,  for  the  purpose  of  determining  invested  capital, 
be  allowed  a  greater  value  than  would  have  been  allowed  under  this 
title  in  computing  the  invested  capital  of  such  previous  owner  if  such 
asset  had  not  been  so  transferred  or  received:  Provided,  That  if  such 
previous  owner  was  not  a  corporation,  then  the  value  of  any  asset  so 
transferred  or  received  shall  be  taken  at  its  cost  of  acquisition  (at  the 
date  when  acquired  by  such  previous  owner)  with  proper  allowance  for 
depreciation,  impairment,  betterment  or  development,  but  no  addition  to 
the  original  cost  shall  be  made  for  any  charge  or  expenditure  deducted 
as  expense  or  otherwise  on  or  after  March  1,  1913,  in  computing  the 
net  income  of  such  previous  owner  for  purposes  of  taxation. 

PART   VII.  — MISCELLANEOUS. 

Sec.  335.  (a)  That  if  a  corporation  (other  than  a  personal  service 
corporation)  makes  return  for  a  fiscal  year  beginning  in  1920  and  ending 
in  1921,  the  war-profits  and  excess-profits  tax  for  the  taxable  year  1921 
shall  be  the  sum  of:  (1)  the  same  proportion  of  a  tax  for  the  entire 
period  computed  under  the  Revenue  Act  of  1918,  which  the  portion 
of  such  period  falling  within  the  calendar  year  1920  is  of  the  entire 
period,  and  (2)  the  same  proportion  of  a  tax  for  the  entire  period  com- 
puted under  this  title,  which  the  portion  of  such  period  falling  within 
the  calendar  year  1921  is  of  the  entire  period.  Any  amount  heretofore 
or  hereafter  paid  on  account  of  the  tax  imposed  for  such  taxable  year 
by  the  Revenue  Act  of  1918  shall  be  credited  towards  the  payment  of 
the  tax  as  above  computed,  and  if  the  amount  so  paid  exceeds  the  amount 
of  such  tax,  the  excess  shall  be  credited  or  refunded  to  the  corporation 
in  accordance  with  the  provisions  of  section  252  of  this  Act. 

(b)  If  a  corporation  (other  than  a  personal  service  corporation) 
makes  a  return  for  a  fiscal  year  beginning  in  1921  and  ending  in  1922, 
the  war-profits  and  excess-profits  tax  for  the  portion  of  the  year  falling 
within  the  calendar  vear  1921  shall  be  an  amount  equivalent  to  the  same 
proportion  of  a  tax  for  the  entire  period  computed  under  this  title,  which 
the  portion  of  such  period  falling  within  the  calendar  year  1921  is  of  the 
entire  period. 

Sec.  336.  That  every  corporation,  not  exempt  under  section  304, 
shall  make  a  return  for  the  purposes  of  this  title.  Such  returns  shall  be 
made,  and  the  taxes  imposed  by  this  title  shall  be  paid,  at  the  same  times 
and  places,  in  the  same  manner,  and  subject  to  the  same  conditions,  as 
is  provided  in  the  case  of  returns  and  payment  of  income  tax  by  cor- 
porations for  the  purposes  of  Title  II,  and  all  the  provisions  of  that  title 
not  inapplicable,  including  penalties,  are  hereby  made  applicable  to  the 
taxes  imposed  by  this  title. 

Sec.  337.  That  in  the  case  of  a  bona  fide  sale  of  mines,  oil  or  gas 
wells,  or  anv  interest  therein,  where  the  principal  value  of  the  property 
has  been  demonstrated  by  prospecting  or  exploration  and  discovery  work 
done  bv  the  taxpayer,  the  portion  of  the  tax  imposed  by  this  title  attrib- 
utable to  such  sale  shall  not  exceed  20  per  centum  of  the  selling  price  of 
such  property  or  interest. 

145 


Effective  Date  of  Title. 

Sec.  338.     That  this  title  shall  take  effect  as  of  January  1,  1921. 

TITLE    XIII.  — GENERAL    ADMINISTRATIVE    PROVISIONS. 

Laws  Made  Applicable. 

Sec.  1300.  That  all  administrative,  special,  or  stamp  provisions  of 
law,  including  the  law  relating  to  the  assessment  of  taxes,  so  far  as 
applicable,  are  hereby  extended  to  and  made  a  part  of  this  Act,  and  every 
person  liable  to  any  tax  imposed  by  this  Act,  or  for  the  collection  thereof, 
shall  keep  such  records  and  render,  under  oath,  such  statements  and 
returns,  and  shall  comply  with  such  regulations  as  the  Commissioner,  with 
the  approval  of  the  Secretary,  may  from  time  to  time  prescribe. 

Method  of  Collecting  Tax. 

Sec.  1301.  That  whether  or  not  the  method  of  collecting  any  tax 
imposed  by  Titles  V.  VI,  VII.  VIII,  IX.  or  X  of  this  Act  is  specifically 
provided  therein,  any  such  tax  may,  under  regulations  prescribed  by  the 
Commissioner  with  the  approval  of  the  Secretary,  be  collected  by  stamp, 
coupon,  serial-numbered  ticket,  or  such  other  reasonable  device  or  method 
as  may  be  necessary  or  helpful  in  securing  a  complete  and  prompt  col- 
lection of  the  tax.  All  administrative  and  penalty  provisions  of  Title 
XI,  in  so  far  as  applicable,  shall  apply  to  the  collection  of  any  tax  which 
the  Commissioner  determines  or  prescribes  shall  be  collected  in  such 
manner.  , 

Penalties. 

Sec.  1302.  (a)  That  any  person  required  under  Titles  V,  VI,  VII, 
VIII,  IX,  X,  or  XII,  to  pay,  or  to  collect,  account  for  and  pay  over  any 
tax,  or  required  by  law  or  regulations  made  under  authority  thereof  to 
make  a  return  or  supply  any  information  for  the  purposes  of  the  com- 
putation, assessment,  or  collection  of  any  such  tax,  who  fails  to  pay, 
collect,  or  truly  account  for  and  pav  over  any  such  tax,  make  any  such 
return  or  supply  any  such  information  at  the  time  or  times  required  by 
law  or  regulation  shall  in  addition  to  other  penalties  provided  by  law  be 
subject  to  a  penalty  of  not  more  than  $1,000. 

(b)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account 
for  and  pay  over  any  such  tax,  make  such  return  or  supply  such  informa- 
tion at  the  time  or  times  required  by  law  or  regulation,  or  who  willfully 
attempts  in  any  manner  to  evade  such  tax  shall  be  guilty  of  a  misdemeanor 
and  in  addition  to  other  penalties  provided  by  law  shall  be  fined  not  more 
than  $10,000  or  imprisoned  for  not  more  than  one  year,  or  both,  together 
with  the  costs  of  prosecution. 

(c)  Any  person  who  willfully  refuses  to  pay,  collect,  or  truly  account 
for  and  pay  over  any  such  tax  shall  in  addition  to  other  penalties 
provided  by  law  be  liable  to  a  penalty  of  the  amount  of  the  tax  evaded, 
or  not  paid,  collected,  or  accounted  for  and  paid  over,  to  be  assessed  and 
collected  in  the  same  manner  as  taxes  are  assessed  and  collected : 
Provided,  hozvever,  That  no  penalty  shall  be  assessed  under  this  sub- 
division for  anv  offense  for  which  a  penalty  may  be  assessed  under 
authority  of  section  3176  of  the  Revised  Statutes,  as  amended,  or  for  any 
offense  for  which  a  penalty  has  been  recovered  under  section  3256  of 
the   Revised    Statutes. 

(d)  The  term  "person"  as  used  in  this  section  includes  an  officer 
or  employee  of  a  corporation  or  a  member  or  employee  of  a  partnership, 
who  as  such  officer,  employee,  or  member  is  under  a  duty  to  perform 
the  act  in  respect  of  which  the  violation  occurs. 

146 


Rules  and  Regulations. 

Sec.  1303.  That  the  Commissioner,  with  the  approval  of  the  Sec- 
retary, is  hereby  authorized  to  make  all  needful  rules  and  regulations  for 
the  enforcement  of  the  provisions  of  this  Act. 

The  Commissioner,  with  such  approval,  may  by  regulation  provide  that 
any  return  required  by  Titles  V,  VI,  VII,  VIII,  IX,  or  X  to  be  under 
oath  may,  if  the  amount  of  the  tax  covered  thereby  is  not  in  excess  of 
$10,  be  signed  or  acknowledged  before  two  witnesses  instead  of  under 
oath. 

Overpayments  and  OvercoUectibns. 

Sec.  1304.  That  in  the  case  of  any  overpayment  or  overcoUection 
of  any  tax  imposed  by  section  602  or  by  Title  V,  Title  VIII,  or  Title  IX, 
the  person  making  such  overpayment  or  overcoUection  may  take  credit 
therefor  against  taxes  due  upon  any  monthly  return,  and  shall  make 
refund  of  any  excessive  amount  collected  by  him  upon  proper  application 
by  the  person  entitled  thereto. 

Articles  Exported. 

Sec.  1305.  That  under  such  rules  and  regulations  as  the  Com- 
missioner with  the  approval  of  the  Secretary  may  prescribe,  the  taxes 
imposed  under  the  provisions  of  Titles  VI,  VII  or  IX  shall  not  apply 
in  respect  to  articles  sold  or  leased  for  export  and  in  due  course  so 
exported.  Under  such  rules  and  regulations  the  amount  of  any  internal- 
revenue  tax  erroneously  or  illegally  collected  in  respect  to  exported 
articles  may  be  refunded  to  the  exporter  of  the  article,  instead  of  to  the 
manufacturer,  if  the  manufacturer  waives  any  claim  for  the  amount 
so    to   be   refunded. 

Fractional   Parts   of  a  Cent. 

Sec.  1306.  That  in  the  payment  of  any  tax  under  this  Act  not  pay- 
able by  stamp  a  fractional  part  of  a  cent  shall  be  disregarded  unless  it 
amounts  to  one-half  cent  or  more,  in  which  case  it  shall  be  increased  to 
1  cent. 

Returns. 

Sec.  1307.  That  whenever  in  the  judgment  of  the  Commissioner 
necessary  he  may  require  any  person,  by  notice  served  upon  him,  to  make 
a  return  or  such  statements  as  he  deems  sufficient  to  show  whether  or 
not  such  person  is  liable  to  tax. 

Examinations   of   Books  and   Witnesses. 

Sec.  1308.  That  the  Commissioner,  for  the  purpose  of  ascertaining 
the  correctness  of  any  return  or  for  the  purpose  of  making  a  return 
where  none  has  been  made,  is  hereby  authorized,  by  any  revenue  agent 
or  inspector  designated  by  him  for  that  purpose,  to  examine  any  books, 
papers,  records,  or  memoranda  bearing  upon  the  matters  required  to  be 
included  in  the  return,  and  may  require  the  attendance  of  the  person 
rendering  the  return  or  of  any  officer  or  employee  of  such  person,  or  the 
attendance  of  any  other  person  having  knowledge  in  the  premises,  and 
may  take  his  testimony  with  reference  to  the  matter  required  by  law  to  be 
included  in  such  return,  with  power  to  administer  oaths  to  such  person  or 
persons. 

Unnecessary  Examinations. 

Sec.  1309.  That  no  taxpayer  shall  be  subjected  to  unnecessary 
examinations  or   investigations,  and   only  one  inspection  of   a  taxpayer's 

147 


books  of  account  shall  be  made  for  each  taxable  year  unless  the  tax- 
payer requests  otherwise  or  unless  the  Commissioner,  after  investigation, 
notifies  the  taxpayer  in  writing  that  an  additional  inspection  is  necessary. 

Jurisdiction  of  Courts. 

Sec.  1310.  (a)  That  if  any  person  is  summoned  under  this  Act 
to  appear,  to  testify,  or  to  produce  books,  papers,  or  other  data,  the  district 
court  of  the  United  States  for  the  district  in  which  such  person  resides 
shall  have  jurisdiction  by  appropriate  process  to  compel  such  attendance, 
testimony,  or  production  of  books,  papers,  or  other  data. 

(b)  The  district  courts  of  the  United  States  at  the  instance  of  the 
United  States  are  hereby  invested  with  such  jurisdiction  to  make  and 
issue,  both  in  actions  at  law  and  suits  in  equity,  writs  and  orders  of 
injunction,  and  of  ne  exeat  republica,  orders  appointing  receivers,  and 
such  other  orders  and  process,  and  to  render  such  judgments  and  decrees, 
granting  in  proper  cases  both  legal  and  equitable  relief  together,  as  may 
be  necessary  or  appropriate  for  the  enforcement  of  the  provisions  of 
this  Act.  The  remedies  hereby  provided  are  in  addition  to  and  not 
exclusive  of  any  and  all  other  remedies  of  the  United  States  in  such 
courts  or  otherwise  to  enforce  such  provisions. 

(c)  Paragraph  Twentieth  of  section  24  of  the  Judicial  Code  is 
amended  by  adding  at  the  end  thereof  the  following  new  paragraph : 

"Concurrent  with  the  Court  of  Claims,  of  any  suit  or  proceeding, 
commenced  ^fter  the  passage  of  the  Revenue  Act  of  1921,  for  the  recovery 
of  any  internal-revenue  tax  alleged  to  have  been  erroneously  or  illegally 
assessed  or  collected,  or  of  any  penalty  claimed  to  have  been  collected 
without  authority  or  any  sum  alleged  to  have  been  excessive  or  in  any 
manner  wrongfully  collected,  under  the  internal-revenue  laws,  even  if 
the  claim  exceeds  $10,000,  if  the  collector  of  internal-revenue  by  whom 
such  tax,  penalty,  or  sum  was  collected  is  dead  at  the  time  such  suit  or 
proceeding  is  commenced." 

Amendments  to  Revised  Statutes. 

Sec.  1311.  That  sections  3164,  3165,  3167,  3172,  3173,  and  3176  of 
the  Revised  Statutes,  as  amended,  are  re-enacted,  without  change,  as 
follows : 

"Sec.  3164.  It  shall  be  the  duty  of  every  collector  of  internal  revenue 
having  knowledge  of  any  willful  violation  of  any  law  of  the  United 
States  relating  to  the  revenue,  within  thirty  days  after  coming  into 
possession  of  such  knowledge,  to  file  with  the  district  attorney  of  the 
district  in  which  any  fine,  penalty,  or  forfeiture  may  be  incurred,  a  state- 
ment of  all  the  facts  and  circumstances  of  the  case  within  his  knowledge, 
together  with  the  names  of  the  witnesses,  setting  forth  the  provisions  of 
law  believed  to  be  so  violated  on  which  reliance  may  be  had  for  con- 
demnation   or    conviction. 

"Sec.  3165.  Every  collector,  deputy  collector,  internal-revenue  agent, 
and  internal-revenue  officer  assigned  to  duty  under  an  internal-revenue 
agent,  is  authorized  to  administer  oaths  and  to  take  evidence  touching 
any  part  of  the  administration  of  the  internal-revenue  laws  with  which 
he  is  charged,  or  where  such  oaths  and  evidence  are  authorized  by  law 
or  regulation  authorized  by  law  to  be  taken. 

"Sec.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  collector, 
agent,  clerk,  or  other  officer  or  employee  of  the  United  States  to  divulge 
or  to  make  known  in  any  manner  whatever  not  provided  bv  law  to  any 
person   the  operations,  style  of  work,  or  apparatus  of  any  manufacturer 

148 


or  producer  visited  by  him  in  the  discharge  of  his  oflficial  duties,  or  the 
amount  or  source  of  income,  profits,  losses,  expenditures,  or  any  particular 
thereof,  set  forth  or  disclosed  in  any  income  return,  or  to  permit  any 
income  return  or  copy  thereof  or  any  book  containing  any  abstract  or 
particulars  thereof  to  be  seen  or  examined  by  any  person  except  as  pro- 
vided by  law ;  and  it  shall  be  unlawful  for  any  person  to  print  or  publish 
in  any  manner  whatever  not  provided  by  law  any  income  return,  or  any 
part  thereof  or  source  of  income,  profits,  losses,  or  expenditures  appear- 
ing in  any  income  return ;  and  any  offense  against  the  foregoing  pro- 
vision shall  be  a  misdemeanor  and  be  punished  by  a  fine  not  exceeding 
$1,000  or  by  imprisonment  not  exceeding  one  year,  or  both,  at  the  dis- 
cretion of  the  court ;  and  if  the  offender  be  an  officer  or  employee  of  the 
United  States  he  shall  be  dismissed  from  office  or  discharged  from  em- 
ployment. 

"Sec.  3172.  Every  collector  shall,  from  time  to  time,  cause  his 
deputies  to  proceed  through  every  part  of  his  district  and  inquire  after 
and  concerning  all  persons  therein  who  are  liable  to  pay  any  internal- 
revenue  tax,  and  all  persons  owning  or  having  the  care  and  manage- 
ment of  any  objects  liable  to  pay  any  tax,  and  to  make  a  list  of  such 
persons  and  enumerate  said  objects. 

"Sec.  3173.  It  shall  be  the  duty  of  any  person,  partnership,  firm, 
association,  or  corporation,  made  liable  to  any  duty,  special  tax,  or  other 
tax  imposed  by  law,  when  not  otherwise  provided  for,  (1)  in  case  of  a 
special  tax,  on  or  before  the  thirty-first  day  of  July  in  each  year,  and  (2) 
in  other  cases  before  the  day  on  which  the  taxes  accrue,  to  make  a  list 
or  return,  verified  by  oath,  to  the  collector  or  a  deputy  collector  of  the 
district  where  located,  of  the  articles  or  objects,  including  the  quantity 
of  goods,  wares,  and  merchandise,  made  or  sold  and  charged  with  a  tax, 
the  several  rates  and  aggregate  amount,  according  to  the  forms  and 
regulations  to  be  prescribed  by  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  for  which  such 
person,  partnership,  firm,  association,  or  corporation  is  liable :  Provided, 
That  if  any  person  liable  to  pay  any  duty  or  tax,  or  owning,  possessing, 
or  haying  the  care  or  management  of  property,  goods,  wares,  and  mer- 
chandise, article  or  objects  liable  to  pay  any  duty,  tax,  or  license,  shall 
fail  to  make  and  exhibit  a  list  or  return  required  by  law,  but  shall  con- 
sent to  disclose  the  particulars  of  any  and  all  the  property,  goods,  wares, 
and  merchandise,  articles,  and  objects  liable  to  pay  any  duty  or  tax,  or 
any  business  or  occupation  liable  to  pay  any  tax  as  aforesaid,  then,  and 
in  that  case,  it  shall"  be  the  duty  of  the  collector  or  deputy  collector  to 
make  such  list  or  return,  which,  being  distinctly  read,  consented  to,  and 
signed  and  verified  by  oath  by  the  person  so  owning,  possessing,  or  having 
the  care  and  management  as  aforesaid,  may  be  received  as  the  list  of 
such  person :  Provided  further,  That  in  case  no  annual  list  or  return  has 
been  rendered  by  such  person  to  the  collector  or  deputy  collector  as 
required  by  law,  and  the  person  shall  be  absent  from  his  or  her  residence 
or  place  of  business  at  the  time  the  collector  or  a  deputy  collector  shall 
call  for  the  annual  list  or  return,  it  shall  be  the  duty  of  such  collector 
or  deputy  collector  to  leave  at  such  place  of  residence  or  business,  with 
some  one  of  suitable  age  and  discretion,  if  such  be  present,  otherwise 
to  deposit  in  the  nearest  post  office,  a  note  or  memorandum  addressed  to 
such  person,  requiring  him  or  her  to  render  to  such  collector  or  deputy 
collector  the  list  or  return  required  by  law  within  ten  days  from  the  date 
of  such  note  or  memorandum,  verified  by  oath.  And  if  any  person,  on 
being  notified  or  required  as  aforesaid,  shall  refuse  or  neglect  to  render 
such  list  or  return  within  the  time  required  as  aforesaid,  or  whenever 
any  person  who  is  required  to  deliver  a  monthly  or  other  return  of  objects 
subject  to  tax  fails  to  do  so  at  the  time  required,  or  delivers  any  return 
which,  in  the  opinion  of  the  collector,  is  erroneous,   false,  or  fraudulent, 

149 


or  contains  any  undervaluation  or  understatement,  or  refuses  to  allow 
any  regularly  authorized  Government  officer  to  examine  the  books  of 
such  person,  firm,  or  corporation,  it  shall  be  lawful  for  the  collector 
to  summon  such  person,  or  any  other  person  having  possession,  custody, 
or  care  of  books  of  account  containing  entries  relating  to  the  business 
of  such  person  or  any  other  person  he  may  deem  proper,  to  appear  before 
him  and  produce  such  books  at  a  time  and  place  named  in  the  summons, 
and  to  give  testimony  or  ansvi^er  interrogatories,  under  oath,  respecting 
any  objects  or  income  liable  to  tax  or  the  returns  thereof.  The  collector 
may  summon  any  person  residing  or  found  within  the  State  or  Territory 
in  which  his  district  lies ;  and  when  the  person  intended  to  be  summoned 
does  not  reside  and  can  not  be  found  within  such  State  or  Territory,  he 
may  enter  any  collection  district  where  such  person  may  be  found  and 
there  make  the  examination  herein  authorized.  And  to  this  end  he  may 
there  exercise  all  the  authority  which  he  might  lawfully  exercise  in  the 
district  for  which  he  was  commissioned :  Provided,  That  'person,'  as 
used  in  this  section,  shall  be  construed  to  include  any  corporation,  joint- 
stock  company  or  association,  or  insurance  company  when  such  construc- 
tion is  necessary  to  carry  out  its  provisions. 

"Sec.  3176.  If  any  person,  corporation,  company,  or  association 
fails  to  make  and  file  a  return  or  list  at  the  time  prescribed  by  law  or 
by  regulation  made  under  authority  of  law,  or  makes,  willfully  or  other- 
wise, a  false  or  fraudulent  return  or  list,  the  collector  or  deputy  collector 
shall  make  the  return  or  list  from  his  own  knowledge  and  from  such 
information  as  he  can  obtain  through  testimony  or  otherwise.  In  any 
such  case  the  Commissioner  may,  from  his  own  knowledge  and  from 
such  information  as  he  can  obtain  through  testimony  or  otherwise, 
make  a  return  or  amend  any  return  made  by  a  collector  or  deputy  collector. 
Any  return  or  list  so  made  and  subscribed  by  the  Commissioner,  or  by 
a  collector  or  deputy  collector  and  approved  by  the  Commissioner,  shall 
be  prima  facie  good  and  sufficient  for  all  legal  purposes. 

"If  the  failure  to  file  a  return  or  list  is  due  to  sickness  or  absence, 
the  collector  may  allow  such  further  time,  not  exceeding  thirty  days,  for 
making  and  filing  the  return  or  list  as  he  deems  proper. 

"The  Commissioner  of  Internal  Revenue  shall  determine  and  assess 
all  taxes,  other  than  stamp  taxes,  as  to  which  returns  or  lists  are  so 
made  under  the  provisions  of  this  section.  In  case  of  any  failure  to  make 
and  file  a  return  or  list  within  the  time  prescribed  by  law,  or  prescribed 
by  the  Commissioner  of  Internal  Revenue  or  the  collector  in  pursuance 
of  law,  the  Commissioner  of  Internal  Revenue  shall  add  to  the  tax  25 
per  centum  of  its  amount,  except  that  when  a  return  is  filed  after  such 
time  and  it  is  shown  that  the  failure  to  file  it  was  due  to  a  reasonable 
cause  and  not  to  willful  neglect,  no  such  addition  shall  be  made  to  the 
tax.  In  case  a  false  or  fraudulent  return  or  list  is  willfully  made,  the 
Commissioner  of  Internal  Revenue  shall  add  to  the  tax  SO  per  centum 
of  its  amount. 

"The  amount  so  added  to  anv  tax  shall  be  collected  at  the  same 
time  and  in  the  same  manner  and  as  part  of  the  tax  unless  the  tax  has 
been  paid  before  the  discovery  of  the  neglect,  falsity,  or  fraud,  in  which 
case  the  amount  so  added  shall  be  collected  in  the  same  manner  as  the 
tax." 

Final   Determinations  and   Assessments. 

Sec.  1312.  That  if  after  a  determination  and  assessment  in  any  case 
the  taxpayer  has  without  protest  paid  in  whole  any  tax  or  penalty,  or 
accepted  any  abatement,  credit,  or  refund  based  on  such  determination 
and  assessment,  and  an  agreement  is  made  in  writing  between  the  tax- 
payer and  the  Commissioner,  with  the  approval  of  the  Secretary,  that  such 
determination  and  assessment  shall  be  final  and  conclusive,  then  (except 
upon  a  showing   of   fraud  or  malfeasance    or    mispresentation    of    fact 

150 


materially  affecting  the  determination  or  assessment  thus  made)  (1)  the 
case  shall  not  be  reopened  or  the  determination  and  assessment  modified 
by  any  officer,  employee,  or  agent  of  the  United  States,  and  (2)  no  suit, 
action,  or  proceeding  to  annul,  modify,  or  set  aside  such  determination 
or  assessment  shall  be  entertained  by  any  court  of  the  United  States. 

Administrative  Review. 

Sec.  1313.  That  in  the  absence  of  fraud  or  mistake  in  mathematical 
calculation,  the  findings  of  facts  in  and  the  decision  of  the  Commissioner 
upon  (or  in  case  the  Secretary  is  authorized  to  approve  the  same,  then 
after  such  approval)  the  merits  of  any  claim  presented  under  or  authorized 
by  the  internal-revenue  laws  shall  not  be  subject  to  review  by  any  other 
administrative  officer,  employee,  or  agent  of  the  United  States. 

Retroactive   Regxxlations. 

Sec.  1314.  That  in  case  a  regulation  or  Treasury  decision  relating 
to  the  internal-revenue  laws  made  by  the  Commissioner  or  the  Secretary, 
or  by  the  Commissioner  with  the  approval  of  the  Secretary,  is  reversed 
by  a  subsequent  regulation  or  Treasury  decision,  and  such  reversal  is 
not  immediately  occasioned  or  required  by  a  decision  of  a  court  of  com- 
petent jurisdiction,  such  subsequent  regulation  or  Treasury  decision  may, 
in  the  discretion  of  the  Commissioner,  with  the  approval  of  the  Secretary, 
be  applied   without  retroactive  effect. 

Refunds. 

Sec.  1315.  That  section  3220  of  the  Revised  Statutes,  as  amended, 
is  reenacted  without  change,  as  follows : 

"Sec.  3220.  The  Commissioner  of  Internal  Revenue,  subject  to  regu- 
lations prescribed  by  the  Secretary  of  the  Treasury,  is  authorized  to 
remit,  refund,  and  pay  back  all  taxes  erroneously  or  illegally  assessed  or 
collected,  all  penalties  collected  without  authority,  and  all  taxes  that 
appear  to  be  unjustlv  assessed  or  excessive  in  amount,  or  in  any  manner 
wrongfully  collected ;  also  to  repay  to  any  collector  or  deputy  collector 
the  full  amount  of  such  sums  of  money  as  may  be  recovered  against 
him  in  any  court,  for  any  internal  revenue  taxes  collected  by  him,  with 
the  cost  and  expenses  of  suit;  also  all  damages  and  costs  recovered 
against  any  assessor,  assistant  assessor,  collector,  deputy  collector,  agent, 
or  inspector,  in  any  suit  brought  against  him  by  reason  of  anything  done 
in  the  due  performance  of  his  official  duty,  and  shall  make  report  to 
Congress  at  the  beginning  of  each  regular  session  of  Congress  of  all 
transactions  under  this  section." 

Sec.  1316.  That  section  3228  of  the  Revised  Statutes  is  amended 
to  read   as    follows : 

"Sec.  3228.  All  claims  for  the  refunding  or  crediting  of  any  in- 
ternal revenue  tax  alleged  to  have  been  erroneously  or  illegally  assessed 
or  collected,  or  of  any  penalty  alleged  to  have  been  collected  without 
authority,  or  of  any  sum  alleged  to  have  been  excessive  or  in  any  manner 
wrongfully  collected,  must  be  presented  to  the  Commissioner  of  Internal 
Revenue  within  four  years  next  after  payment  of  such  tax,  penalty, 
or  sum." 

This  section,  except  as  modified  by  section  252,  shall  apply  retro- 
actively to  claims  for  refund  under  the  Revenue  Act  of  1916,  the  Revenue 
Act  of  1917,  and  the  Revenue  Act  of  1918. 

Sec.  1317.  That  the  paragraph  of  section  3689  of  the  Revised 
Statutes,    as    amended,    reading    as    follows :    "Refunding   taxes    illegally 

151 


collected  (internal  revenue)  :  To  refund  and  pay  back  duties  erroneously 
or  illegally  assessed  or  collected  under  the  internal  revenue  laws,"  is 
repealed  from  and  after  June  30,  1920;  and  the  Secretary  of  the  Treasury 
shall  submit  for  the  fiscal  year  1921,  and  annually  thereafter,  an  estimate 
of  appropriations  to  refund  and  pay  back  duties  or  taxes  erroneously 
or  illegally  assessed  or  collected  under  the  internal-revenue  laws,  and  to 
pay  judgments,  including  interest  and  costs,  rendered  for  taxes  or 
penalties  erroneously  or  illegally  assessed  or  collected  under  the  internal- 
revenue  laws. 

Limitations   upon   Suits   and   Prosecutions. 

Sec.  1318.  That  section  3226  of  the  Revised  Statutes  is  amended 
to  read  as  follows : 

"Sec.  3226.  No  suit  or  proceeding  shall  be  maintained  in  any  court 
for  the  recovery  of  any  internal-revenue  tax  alleged  to  have  been 
erroneously  or  illegally  assessed  or  collected,  or  of  any  penalty  claimed 
to  have  been  collected  without  authority,  or  of  any  sum  alleged  to  have 
been  excessive  or  in  any  manner  wrongfully  collected,  until  a  claim  for 
refund  or  credit  has  been  duly  filed  with  the  Commissioner  of  Internal 
Revenue,  according  to  the  provisions  of  law  in  that  regard,  and  the 
regulations  of  the  Secretary  of  the  Treasury  established  in  pursuance 
thereof.  No  such  suit  or  proceeding  shall  be  begun  before  the  expiration 
of  six  months  from  the  date  of  filing  such  claim  unless  the  Commissioner 
renders  a  decision  thereon  within  that  time,  nor  after  the  expiration  of 
five  years  from  the  date  of  the  payment  of  such  tax,  penalty,  or  sum." 

This  section  shall  not  affect  any  suit  or  proceeding  instituted  prior 
to  the  passage  of  this  Act.  but  shall  apply  to  all  suits  and  proceedings 
instituted  after  the  passage  of  this  Act,  whether  or  not  barred  by  prior 
Acts  of  Congress. 

Sec.  1319.  That  section  3227  of  the  Revised  Statutes  is  hereby 
repealed  but  such  repeal  shall  not  affect  any  suit  or  proceeding  instituted 
prior  to  the  passage  of  this  Act. 

Sec.  1320.  That  no  suit  or  proceeding  for  the  collection  of  any 
internal  revenue  tax  shall  be  begun  after  the  expiration  of  five  years 
from  the  time  such  tax  was  due,  except  in  the  case  of  fraud  with  intent 
to  evade  tax,  or  willful  attempt  in  any  manner  to  defeat  or  evade  tax. 
This  section  shall  not  apply  to  suits  or  proceedings  for  the  collection 
of  taxes  under  section  250  of  this  Act,  nor  to  suits  or  proceedings  begun 
at  the  time  of  the  passage  of  this  Act. 

Sec.  1321.  (a)  That  the  Act  entitled  "An  Act  to  limit  the  time 
within  which  prosecutions  may  be  instituted  against  persons  charged 
with  violating  internal-revenue  laws,"  approved  July  5,  1884,  is  amended 
to  read  as  follows : 

"That  no  person  shall  be  prosecuted,  tried,  or  punished  for  any  of 
the  various  offenses  arising  under  the  internal-revenue  laws  of  the  United 
States  unless  the  indictment  is  found  or  the  information  instituted  within 
three  years  next  after  the  commission  of  the  offense:  Provided,  That  the 
time  during  which  the  person  committing  the  offense  is  absent  from  the 
district  wherein  the  same  is  committed  shall  not  be  taken  as  any  part 
of  the  time  limited  by  law  for  the  commencement  of  such  proceedings : 
Provided  further.  That  the  provisions  of  this  Act  shall  not  apply  to 
offenses  committed  prior  to  its  passage :  Provided  further,  That  where 
a  complaint  shall  be  instituted  before  a  commissioner  of  the  United 
States  within  the  period  above  limited,  the  time  shall  be  extended  until 
the  discharge  of  the  grand  jury  at  its  next  session  within  the  district: 
And  provided  further,  That  this  Act  shall  not  apply  to  offenses  com- 
mitted by  officers  of  the  United  States." 

152 


(b)  Any  prosecution  or  proceeding  under  an  indictment  found  or 
information  instituted  prior  to  the  passage  of  this  Act  shall  not  be 
affected  in  any  manner  by  this  amendment,  but  such  prosecution  or  pro- 
ceeding shall  be  subject  to  the  limitations  imposed  by  law  prior  to  the 
passage  of  this  Act. 

Assessments. 

Sec.  1322.  That  all  internal  revenue  taxes,  except  as  provided  in 
section  250  of  this  Act,  shall,  notwithstanding  the  provisions  of  section 
3182  of  the  Revised  Statutes  or  any  other  provision  of  law,  be  assessed 
within  four  years  after  such  taxes  became  due,  but  in  the  case  of  fraud 
with  intend  to  evade  tax  or  willful  attempt  in  any  manner  to  defeat  or 
evade  tax,  such  tax  may  be  assessed  at  any  time. 

Fraudulent  Returns, 

Sec.  1323.  That  section  3225  of  the  Revised  Statutes  of  the  United 
States,  as  amended,  is  re-enacted  without  change  as  follows : 

"Sec.  3225.  When  a  second  assessment  is  made  in  case  of  any  list, 
statement,  or  return,  which  in  the  opinion  of  the  collector  or  deputy 
collector  was  false  or  fraudulent,  or  contained  any  understatement  or 
undervaluation,  such  assessment  shall  not  be  remitted,  nor  shall  taxes 
collected  under  such  assessment  be  refunded,  or  paid  back,  or  recovered 
by  any  suit,  unless  it  is  proved  that  such  list,  statement,  or  return  was 
not  willfully  false  or  fraudulent  and  did  not  contain  any  willful  under- 
statement or  undervaluation." 

Interest  on  Refunds  and  Judgments. 

Sec.  1324.  (a)  That  upon  the  allowance  of  a  claim  for  the  refund 
of  or  credit  for  internal  revenue  taxes  paid,  interest  shall  be  allowed 
and  paid  upon  the  total  amount  of  such  refund  or  credit  at  the  rate  of 
one-half  of  1  per  centum  per  month  to  the  date  of  such  allowance,  as 
follows:  (1)  if  such  amount  was  paid  under  a  specific  protest  setting 
forth  in  detail  the  basis  of  and  reasons  for  such  protest,  from  the  time 
when  such  tax  was  paid,  or  (2)  if  such  amount  was  not  paid  under 
protest  but  pursuant  to  an  additional  assessment,  from  the  time  such 
additional  assessment  was  paid,  or  (3)  if  no  protest  was  made  and  the 
tax  was  not  paid  pursuant  to  an  additional  assessment,  from  six  months 
after  the  date  of  filing  of  such  claim  for  refund  or  credit.  The  term 
"additional  assessment"  as  used  in  this  section  means  a  further  assess- 
ment for-  a  tax  of  the  same  character  previously  paid  in  part. 

(b)   Section  177  of  the  Judicial  Code  is  amended  to  read  as  follows : 

"Sec.  177.  No  interest  shall  be  allowed  on  any  claim  up  to  the  time 
of  the  rendition  of  judgment  by  the  Court  of  Claims,  unless  upon  a 
contract  expressly  stipulating  for  the  payment  of  interest,  except  that 
interest  may  be  allowed  in  any  judgment  of  any  court  rendered  after 
the  passage  of  the  Revenue  Act  of  1921  against  the  United  States 
for  any  internal-revenue  tax  erroneously  or  illegally  assessed  or 
collected,  or  for  any  penalty  collected  without  authority  or  any  sum 
which  was  excessive  or  in  any  manner  wrongfully  collected,  under  the 
internal-revenue  laws." 

Payment  of  Taxes  by  Check  or  United  States  Securities. 

Sec.  1325.  That  collectors  may  receive,  at  par  with  an  adjustment 
for  accrued  interest,  notes  or  certificates  of  indebtedness  issued  by  the 
United   States  and  uncertified  checks  in  payment  of  income,  war-profits 

153 


and  excess-profits  taxes  and  any  other  taxes  payable  other  than  by 
stamp,  during  such  time  and  under  such  regulations  as  the  Commissioner, 
with  the  approval  of  the  Secretary,  shall  prescribe ;  but  if  a  check  so 
received  is  not  paid  by  the  bank  on  which  it  is  drawn  the  person  by 
whom  such  check  has  been  tendered  shall  remain  liable  for  the  pay- 
ment of  the  tax  and  for  all  legal  penalties  and  additions  the  same  as 
if  such  check  had  not  been  tendered. 

Frauds  on  Purchasers. 

Sec.  1326.  That  whoever  in  connection  with  the  sale  or  lease,  or 
offer  for  sale  or  lease,  of  any  article,  or  for  the  purpose  of  making 
such  sale  or  lease,  makes  any  statement,  written  or  oral,  (1)  intended 
or  calculated  to  lead  any  person  to  believe  that  any  part  of  the  price 
at  which  such  article  is  sold  or  leased,  or  offered  for  sale  or  lease,  con- 
sists of  a  tax  imposed  under  the  authority  of  the  United  States,  or  (2) 
ascribing  a  particular  part  of  such  price  to  a  tax  imposed  under  the 
authority  of  the  United  States,  knowing  that  such  statement  is  false 
or  that  the  tax  is  not  so  great  as  the  portion  of  such  price  ascribed  to 
such  tax,  shall  be  guilty  of  a  misdemeanor  and  upon  conviction  thereof 
shall  be  punished  by  a  fine  of  not  more  than  $1,000  or  by  imprisonment 
not  exceeding  one  year,  or  both. 

Tax  Simplification  Board. 

Sec.  1327.  (a)  That  there  is  hereby  established  in  the  Department 
of  the  Treasury  a  board  to  be  known  as  the  "Tax  Simplification  Board" 
(hereinafter  in  this  section  called  the  "Board"),  to  be  composed  as 
follows : 

(1)  Three  members  who  shall  represent  the  public,  to  be  appointed 
by   the  President ;   and 

(2)  Three  members  who  shall  represent  the  Bureau  of  Internal 
Revenue  and  shall  be  officers  or  employees  of  the  United  States  serving 
in  such  Bureau,  to  be  appointed  by  the  Secretary. 

(b)  Any  vacancy  in  the  Board  shall  be  filled  in  the  same  manner 
as  the  original  appointment.  The  members  representing  the  public  shall 
serve  without  compensation  except  reimbursement  for  travelling,  sub- 
sistence, and  other  necessary  expenses  incurred  in  the  performance  of 
the  duties  vested  in  them  by  this  section.  The  members  representing 
the  Bureau  of  Internal  Revenue  shall  serve  without  compensation  in 
addition  to  that  received  for  their  service  in  such  Bureau. 

(c)  The  Secretary  shall  furnish  the  Board  with  such  clerical 
assistance,  quarters  and  stationery,  furniture,  office  equipment,  and  other 
supplies  as  may  be  necessary  for  the  performance  of  the  duties  vested 
in  them  by  this  section. 

(d)  It  shall  be  the  duty  of  the  Board  to  investigate  the  procedure 
of  and  the  forms  used  by  the  Bureau  in  the  administration  of  the  internal 
revenue  laws,  and  to  make  recommendations  in  respect  to  the  simplifica- 
tion thereof.  The  Board  shall  make  a  report  to  the  Congress  on  or  before 
the  first  Monday  of  December  in  each  year. 

(e)  The  expenditures  of  the  Board  shall  be  paid  upon  vouchers 
approved  by  the  Board  and  signed  by  the  chairman  thereof.  For  the 
expenditures  of  the  Board  for  the  fiscal  year  ending  June  30,  1922,  there 
is  authorized  to  be  appropriated,  out  of  any  money  in  the  Treasury  not 
otherwise  appropriated,   the  sum  of  $10,000. 

(f)  The  Board  shall  cease  to  exist  on  December  31,  1924. 


154 


Consolidation    of    Liberty   Bond   Tax   Exemptions. 

Sec.  1328.  That  the  various  Acts  authorizing  the  issues  of  Liberty 
Bonds  are  amended  and  supplemented  as  follows : 

(a)  On  and  after  January  1,  1921,  4  per  centum  and  4Vi  per  centum 
Liberty  Bonds  shall  be  exempt  from  graduated  additional  income  taxes, 
commonly  known  as  surtaxes,  and  excess-profits  and  war-profits  taxes, 
now  or  hereafter  imposed  by  the  United  States  upon  the  income  or  profits 
of  individuals,  partnerships,  corporations,  or  associations,  in  respect  to 
the  interest  on  aggregate  principal  amounts  thereof   as  follows : 

Until  the  expiration  of  two  years  after  the  date  of  the  termination 
of  the  war  between  the  United  States  and  the  German  Government,  as 
fixed  by  proclamation  of  the  President,  on  $125,000  aggregate  principal 
amount;  and  for  three  years  more  on  $50,000  aggregate  principal  amount. 

(b)  The  exemptions  provided  in  subdivision  (a)  shall  be  in  addition 
to  the  exemptions  provided  in  section  7  of  the  Second  Liberty  Bond  Act, 
and  in  addition  to  the  exemption  provided  in  subdivision  (3)  of  section 
1  of  the  Supplement  to  the  Second  Liberty  Bond  Act  in  respect  to  bonds 
issued  upon  conversion  of  3%  per  centum  bonds,  but  shall  be  in  lieu 
of  the  exemptions  provided  and  free  from  the  conditions  and  limitations 
imposed  in  subdivisions  (1)  and  (2)  of  section  1  of  the  Supplement  to 
Second  Liberty  Bond  Act  and  in  section  2  of  the  Victory  Liberty  Loan 
Act. 

Deposit  of  United  States  Bonds  or  Notes  in  Lieu  of  Surety. 

Sec.  1329.  That  wherever  by  the  laws  of  the  United  States  or 
regulations  made  pursuant  thereto,  any  person  is  required  to  furnish  any 
recognizance,  stipulation,  bond,  guaranty,  or  undertaking,  hereinafter 
called  "penal  bond,"  with  surety  or  sureties,  such  person  may,  in  lieu  of 
such  surety  or  sureties,  deposit  as  security  with  the  oflficial  having 
authority  to  approve  such  penal  bond,  United  States  Liberty  Bonds  or  other 
bonds  or  notes  of  the  United  States  in  a  sum  equal  at  their  par  value 
to  the  amount  of  such  penal  bond  required  to  be  furnished,  together 
with  an  agreement  authorizing  such  official  to  collect  or  sell  such  bonds 
or  notes  so  deposited  in  case  of  any  default  in  the  performance  of  any 
of  the  conditions  or  stipulations  of  such  penal  bond.  The  acceptance 
of  such  United  States  bonds  or  notes  in  lieu  of  surety  or  sureties  required 
by  law  shall  have  the  same  force  and  effect  as  individual  or  corporate 
sureties,  or  certified  checks,  bank  drafts,  post-office  money  orders,  or 
cash,  for  the  penalty  or  amount  of  such  penal  bond.  The  bonds  or  notes 
deposited  hereunder,  and  such  other  United  States  bonds  or  notes  as 
may  be  substituted  therefor  from  time  to  time  as  such  security,  may  be 
deposited  with  the  Treasurer  of  the  United  States,  a  Federal  reserve 
bank,  or  other  depository  duly  designated  for  that  purpose  by  the 
Secretary,  which  shall  issue  receipt  therefor,  describing  such  bonds  or 
notes  so  deposited.  As  soon  as  security  for  the  performance  of  such 
penal  bond  is  no  longer  necessary,  such  bonds  or  notes  so  deposited, 
shall  be  returned  to  the  depositor :  Provided,  That  in  case  a  person  or 
persons  supplying  a  contractor  with  labor  or  material  as  provided  by 
the  Act  of  Congress,  approved  February  24,  1905  (33  Stat.  811),  entitled 
"An  Act  to  amend  an  Act  approved  August  thirteenth,  eighteen  hundred 
and  ninety-four,  entitled  'An  Act  for  the  protection  of  persons  furnishing 
materials  and  labor  for  the  construction  of  public  works,' "  shall  file 
with  the  obligee,  at  any  time  after  a  default  in  the  performance  of  any 
contract  subject  to  said  Acts,  the  application  and  affidavit  therein  pro- 
vided, the  obligee  shall  not  deliver  to  the  obligor  the  deposited  bonds  or 
notes  nor  any  surplus  proceeds  thereof  until  the  expiration  of  the  time 
limited  by  said  Acts  for  the  institution  of  suit  by  such  person  or  persons, 
and,  in  case  suit  shall  be  instituted  within  such  time,  shall  hold  said 
bonds   or   notes    or    proceeds    subject    to    the   order   of    the    court   having 

155 


jurisdiction  thereof :  Provided  further.  That  nothing  herein  contained 
shall  affect  or  impair  the  priority  of  the  claim  of  the  United  States 
against  the  bonds  or  notes  deposited  or  any  right  or  remedy  granted 
by  said  Acts  or  by  this  section  to  the  United  States  for  default  upon  any 
obligation  of  said  penal  bond:  Provided  further,  That  all  laws  incon- 
sistent with  this  section  are  hereby  so  modified  as  to  conform  to  the 
provisions  hereof :  And  provided  further.  That  nothing  contained  herein 
shall  affect  the  authority  of  courts  over  the  security,  where  such  bonds  are 
taken  as  security  in  judicial  proceedings,  or  the  authority  of  any  admin- 
istrative officer  of  the  United  States  to  receive  United  States  bonds  for 
security  in  cases  authorized  by  existing  laws.  The  Secretary  may  pre- 
scribe rules  and  regulations  necessary  and  proper  for  carrying  this 
section  into  effect. 

Lost  Stamps  for  Tobacco,  Cigars,  and  so  Forth. 

Sec.  1330.  That  section  3315  of  the  Revised  Statutes,  as  amended, 
is  re-enacted  without  change,  as  follows : 

"Sec.  3315.  The  Commissioner  of  Internal  Revenue  may,  under 
regulations  prescribed  by  him  with  the  approval  of  the  Secretary  of  the 
Treasury,  issue  stamps  for  restamping  packages  of  distilled  spirits, 
tobacco,  cigars,  snuff,  cigarettes,  fermented  liquors,  and  wines  which  have 
been  duly  stamped  but  from  which  the  stamps  have  been  lost  or  destroyed 
by  unavoidable  accident." 

Consolidated   Returns  for  Year  1917. 

Sec.  1331.  (a)  That  Title  II  of  the  Revenue  Act  of  1917  shall 
be  construed  to  impose  the  taxes  therein  mentioned  upon  the  basis  of 
consolidated  returns  of  net  income  and  invested  capital  in  the  case  of 
domestic  corporations  and  domestic  partnerships  that  were  affiliated  dur- 
ing the  calendar  year  1917. 

(b)  For  the  purpose  of  this  section  a  corporation  or  partnership 
was  affiliated  with  one  or  more  corporations  or  partnerships  (1)  when 
such  corporation  or  partnership  owned  directly  or  controlled  through 
closely  affiliated  interests  or  by  a  nominee  or  nominees  all  or  substantially 
all.  the  stock  of  the  other  or  others,  or  (2)  when  substantially  all  the 
stock  of  two  or  more  corporations  or  the  business  of  two  or  more  part- 
nerships was  owned  by  the  same  interests :  Proznded,  That  such  corpora- 
tions or  partnerships  were  engaged  in  the  same  or  a  closely  related  busi- 
ness, or  one  corporation  or  partnership  bought  from  or  sold  to  another 
corporation  or  partnership  products  or  services  at  prices  above  or  below 
the  current  market,  thus  effecting  an  artificial  distribution  of  profits,  or 
one  corporation  or  partnership  in  any  way  so  arranged  its  financial  rela- 
tionships with  another  corporation  or  partnership  as  to  assign  to  it  a 
disproportionate  share  of  net  income  or  invested  capital.  For  the  pur- 
poses of  this  section,  public  service  corporations  which  (1)  were  operated 
independently,  (2)  were  not  physically  connected  or  merged  and  (3)  did 
not  receive  special  permission  to  make  a  consolidated  return,  shall  not  be 
construed  to  have  been  affiliated ;  but  a  railroad  or  other  public  utility 
which  was  owned  by  an  industrial  corporation  and  was  operated  as  a  plant 
facility  or  as  an  integral  part  of  a  group  organization  of  affiliated  corpora- 
tions which  were  required  to  file  a  consolidated  return  shall  be  construed 
to  have  been  affiliated. 

(c)  The  provisions  of  this  section  are  declaratory  of  the  provisions 
of  Title  II  of  the  Revenue  Act  of  1917. 

Alternative  Tax  on   Personal  Service   Corporations. 

Sec.  1332.  (a)  That  if  either  subdivision  (e)  of  section  218  of  the 
Revenue  Act  of   1918  or  subdivision    (d)   of  section  218  of  this   Act  is 

156 


by  final  adjudication  declared  invalid,  there  shall,  in  addition  to  all 
other  taxes,  be  levied,  collected,  and  paid  on  the  net  income  (as  defined 
in  section  232)  received  during  the  calendar  years  1918,  1919,  1920,  and 
1921,  by  every  personal  service  corporation  (as  defined  in  section  200) 
included  within  the  provisions  of  such  subdivisions,  a  tax  equal  to  the 
taxes  imposed  by  Titles  II  and  III  of  the  Revenue  Act  of  1918  and,  in 
the  case  of  income  received  during  the  calendar  year  1921,  by  Titles  II 
and  III  of  this  Act. 

(b)  In  such  event  every  such  personal  service  corporation  shall,  on 
or  before  the  fifteenth  day  of  the  sixth  month  following  the  date  of 
entry  of  decree  upon  such  final  adjudication,  make  a  return  of  any  income 
received  during  each  of  the  calendar  years  1918,  1919,  1920,  and  1921  in 
the  manner  prescribed  by  the  Revenue  Act  of  1918  (or  in  the  manner 
prescribed  by  this  Act,  in  the  case  of  income  received  during  the  calendar 
year  1921).  Such  return  shall  be  made  and  the  net  income  shall  be 
computed  on  the  basis  of  the  taxpayer's  annual  accounting  period  (fiscal 
year  or  calendar  year,  as  the  case  may  be)  in  the  manner  provided  for 
other  corporations  under  the  Revenue  Act  of  1918  and  this  Act. 

(c)  If  either  subdivision  (e)  of  section  218  of  the  Revenue  Act  of 
1918  or  subdivision  (d)  of  section  218  of  this  Act  is  so  declared  invalid, 
claims  for  credit  or  refund  of  taxes  paid  under  both  such  sections  shall 
be  allowed,  if  made  within  the  time  provided  in  subdivision  (f)  of  this 
section. 

(d)  In  case  the  claims  for  credit  or  refund,  filed  within  six  months 
from  such  date  of  entry  of  decree,  represent  less  than  30  per  centum 
of  the  outstanding  stock  or  shares  in  the  corporation,  the  amount  of 
taxes  imposed  by  this  section  upon  such  corporation  shall  be  reduced 
to  that  proportion  thereof  which  the  number  of  stock  or  shares  owned 
by  the  shareholders  or  members  making  such  claims  bears  to  the  total 
number  of  stock  or  shares  outstanding. 

(e)  The  tax  imposed  by  this  section  shall  be  assessed,  collected,  and 
paid  upon  the  same  basis,  in  the  same  manner,  and  subject  to  the  same 
provisions  of  law,  including  penalties,  as  the  taxes  imposed  by  sections 
230  and  301  of  the  Revenue  Act  of  1918  (or  by  sections  230  and  301  of 
this  Act,  in  the  case  of  income  received  during  the  calendar  year  (1921), 
but  no  interest  or  penalties  shall  be  due  or  payable  thereon  for  any 
period  prior  to  the  date  upon  which  the  return  is  by  this  section  required 
to  be  made  and  the  first  installment  paid.  The  amount  of  tax  paid  by 
any  shareholder  or  member  of  a  personal  service  corporation  pursuant  to 
the  provisions  of  subdivision  (e)  of  section  218  of  the  Revenue  Act  of 
1918  or  subdivision  (d)  of  section  218  of  this  Act  shall  be  credited 
against  the  tax  due  from  such  corporation  under  this  section  upon  the 
joint  written  application  of  such  corporation  and  such  shareholder  or 
member  or  his  representatives,  heirs,  or  assigns,  if  such  application  is 
filed  with  the  Commissioner  within  six  months  from  such  date  of  entry 
of  decree. 

(f)  Notwithstanding  any  other  provision  of  law,  no  claim  for  a 
credit  or  refund  of  taxes  paid  under  subdivision  (e)  of  section  218  of 
the  Revenue  Act  of  1918  or  subdivision  (d)  of  section  218  of  this  Act, 
may  be  filed  after  the  expiration  of  six  months  from  such  date  of  entry 
of  decree :  Provided,  however.  That  a  personal  service  corporation  of 
which  no  shareholder  or  member  has  filed  such  claim  within  such  period 
of  six  months,  shall  not  be  subject  to  the  tax  imposed  by  this  section. 


157 


TITLE    XIV.— GENERAL    PROVISIONS. 
Repeals. 

Sec.  1400.  (a)  That  the  following  parts  of  the  Revenue  Act  of 
1918  are  repealed,  to  take  effect  (except  as  otherwise  provided  in  this 
Act)  on  January  1,  1922,  subject  to  the  limitations  provided  in  sub- 
division  (b)  : 

Title  II  (called  "Income  Tax")  as  of  January  1,  1921 ; 

Title  III  (called  "War-Profits  and  Excess-Profits  Tax")  as  of 
January  1,  1921 ; 

*        *        *        * 

Sections  1314.  1315,  1316,  1317.  1319,  and  1320  of  Title  XIII  (being 
certain  administrative  provisions)   on  the  passage  of  this  Act. 

(b)  The  parts  of  the  Revenue  Act  of  1918  which  are  repealed  by 
this  Act  shall  (unless  otherwise  specifically  provided  in  this  Act)  remain 
in  force  for  the  assessment  and  collection  of  all  taxes  which  have  accrued 
under  the  Revenue  Act  of  1918  at  the  time  such  parts  cease  to  be  in 
effect,  and  for  the  imposition  and  collection  of  all  penalties  or  forfeitures 
which  have  accrued  or  may  accrue  in  relation  to  any  such  taxes.  In  the 
case  of  any  tax  imposed  by  any  part  of  the  Revenue  Act  of  1918  repealed 
by  this  Act,  if  there  is  a  tax  imposed  by  this  Act  in  lieu  thereof,  the 
provision  imposing  such  tax  shall  remain  in  force  until  the  corresponding 
tax  under  this  Act  takes  effect  under  the  provisions  of  this  Act.  The 
unexpended  balance  of  any  appropriation  heretofore  made  and  now 
available  for  the  administration  of  any  such  part  of  the  Revenue  Act  of 
1918  shall  be  available  for  the  administration  of  this  Act  or  the  cor- 
responding provision  thereof. 


Saving  Clause  in  Event  of  Unconstitutionality. 

Sec.  1403.  That  if  any  provision  of  this  Act,  or  the  application 
thereof  to  any  person  or  circumstances,  is  held  invalid,  the  remainder 
of  the  Act,  and  the  application  of  such  provision  to  other  persons  or 
circumstances,  shall  not  be  affected  thereby. 

Effective  Date  of  Act. 

Sec.  1404.  That  except  as  otherwise  provided,  this  Act  shall  take 
effect  upon   its  passage. 


158 


INDEX 


Pars.   1-166,   Individuals;   Pars.   167-210,   Corporations;   Pars.   211-267, 
General  Provisions;  Pars.  268-304,  Administrative  Provisions. 

Paragraphs 

Abatement,  claims   for 283-4 

Accounting   period 246-250 

Accrual  basis,  returns  on 251,253-4 

Administrative   provisions 268-304 

Affiliated  corporations.     See  "consolidated  returns" 
Aliens 

Nonresident    265-7 

Returns  by   211-12,238,255,257,261,267 

Withholding  tax  at  source 235 

Resident     1,  261,  266-7 

Alimony  not  deductible   71 

Not   income    - ^ «....«.«.  ...^. ..  3 

Amortization    62a,  194 

Appeals  on  additional  assessments 274 

On  understated  returns ^. 274 

Assessments,  additional   271-276 

Final  by  agreement   304 

Fraudulent  returns  or  failure  to  file. _. ^. .         268 

Associations    167 

Attorneys,  registration  with  Internal  Revenue  Bureau 302 

Bad  debts,  deductible 63-69,  141-2,  191 

Income    from    charged    off 128,185 

Reserve  for  68 

Bank  deposits,  no  withholding  on  interest  from 257 

Basis  for  return:     See  accrual,  see  cash 

For  gains  or  losses  on  capital  sales:     See  gains,  see  losses 

Beneficiaries  under  estate  or  trust 

Credits   against   net   income 23 

Deduction?  for  payments  to ^_^ 143,165 

Income    to    20,166 

Payment  of  taxes  by  166 

Returns    by .__ 20,161 

Bequests:     See  inheritance 

Bonds 

Bought  between  interest  dates 13,  154 

Tax-exempt    ,. . .  12,  119-127,  175,  179 

Tax-free  covenant 

Taxes  paid  and  interest  from 12,  154,  190,  204 

Withholding  at  source  on  interest  from 260-264 

Bonus  stock,  sale  of 96 

Bonuses,    deductible    when 45 

Income  when   8 

Business,  income  from   32-40,  175-185 

Expenses  in    ." 41-78,186-198 

Loss    in    79-80,  197 

Capital  accounts     30,  70,  162,  178,  185,  186 

Capital   net  gain '.'. 153,  201 

Cash  basis,  returns  on _^ 251-2,254 

Charitable   contributions    139-140,  158,  159,  161,  186 

Children:     See  dependents 

159 


Pars.   1-166,   Individuals;   Pars.   167-210,   Corporations;   Pars.   211-267, 
General  Provisions;  Peirs.  268-304,  Administrative  Provisions. 

Paragraphs 

Claims  for  abatement  283-4 

Credit    ^ 285-7 

Refund    ^ 288-92 

Committee  on  appeals  and  review 301 

Compromises      282 

Computation  of  tax 145-153,  199-205,  208-210 

Consolidated    returns    172-3,  199,  208,  229 

Contingent    income    4 

Contributions,  charitable 1 . . . .  139-140,  158,  159,  161,  186 

Copy  of  return    299 

Copyrights,   income   from 30,  182 

Corporations     167-210 

Computation    of    tax 199-205 

Deductions  allowed  to   186-198 

Definition    of    167 

Formed  from  Nov.  23,  1921-March  23,  1921 168 

Income  of  175-185 

Returns     170-174 

Tax-exempt     169 

Tax  on   200 

Cost   of   merchandise    36-7,177 

Credit,    claims    for 285-7 

Credits  against  net  income 16,  18,  23,  147-150,  165,  199 

Credits  against  the   tax 154-5,  204 

Credit,    excess-profits    208 

Date,  effective,  of  Act 211 

Death  during  year   ISO,  226.  217>.  277 

Deductions  from  gross  income  130-144,  186-198 

from  business  income   41-78 

Dependents     148 

Depletion     58a,  193 

Depreciation     ^ 26,  54-57,  83,  192 

Destruction    of    property 59-62,  108-9,  135-138,  195,  196 

Discounts    34, 36 

Dividends 

Credit    to    individuals.. 112,  129,  147 

Deduction  to  corporation    198 

Income  from    112-118,129,183,184 

Liquidating      110 

Scrip    116,  189 

Stock 116-117,  97-99 

Tax-exempt,  when  added  to  sale  price 87 

Estates  and  Trusts:     In  general 160-166 

Income   from    19-23 

Returns    161,  163,  226-7,  239,  240-1 

Evasion  of  surtaxes  by  corporation 202 

Examination  of  books 276 

Excess-profits   tax    206-10 

Exchanges:      Gain    or   loss 101-5 

Exemption 

Corporations,  credit  against  net  income   199 

from   tax    169 

Estates  and  Trusts,  credit 165 

Liberty    Bonds    ^ 119-127.179 

Personal     148-150 

160 


Pars.   1-166,   Individuals;   Pars.   167-210,   Corporations;   Pars.  211-267, 
General  Provisions;  Pars.  268-304,  Administrative  Provisions. 

Paragraphs 

Expenses 

Administration     ^ 162 

Business     41-78 

Capital    70,  162,  186 

Corporation 186-198 

Organization    186 

Personal     71,    144 

Salaries     10.  186-7 

Traveling    .:.^ 10,  43,  77,  186 

When  deductible  72,  186 

Extensions  for  filing  returns 244,  171 

For  payment  of  taxes 269,  275 

Fiduciaries:     See  Estates  and  Trusts 

Foreclosure  sale,  profit  or  loss  on 107 

Fiscal  year    246-250 

Foreign  corporations,  see  in  general 167,  175 

Credit  for  tax  paid  at  source 204 

Dividends  from,  as  credit ._^ 147 

As  deduction    198 

Withholding  at  source  from 256 

Forms 

Abatement,  claims  for   284 

Alien  nonresident   211-12,  255,  257.  261,  267 

Resident    261,  266-7 

Corporation     170,  174-5 

Resident    foreign    261 

Credit,  claims  for  285 

Fiduciary     161,  163 

Individual    4-5,  222-3 

Information    returns    230,234 

Ownership   Certificates  on  bond  interest 261,263 

Partnership     158,  174-5,  255 

Personal  service  corporation   159 

Refund,    claims    for    289 

Withholding    agent    264,  267 

Gains    from   sales 81-111,  164,  195 

Gifts 

Deduction,  none  on  82,  144 

Income,  none  from   3,  6,  9 

Sale  of,  profit  or  loss 91-95 

Gross    income    2,  3,  175,  216 

Head  of  family 148-9 

Husband  and  wife 

Personal    exemption    148-150 

Returns     214-15,  217,  223-^ 

Income 

Gross 2,175 

Net    145,  199 

Tax-exempt     3,  12,  121,  175,  179 

Information  at  source,  returns 230-237 

Inheritance 

Income,   none   on    3 

Sale  of,  profit  or  loss  on ._. _. 91-2,  94-5 

161 


Pars.   1-166,  Individualsj  Pars.  167-210,  Corporations;   Pars.  211-267, 
General  Provisions;  Pars.  268-304,  Administrative  Provisions. 

Paragraphs 

Taxes   deductible    51,  134,  190 

Injunctions    297 

Inspection  of  returns 299 

Installments,    sale    on 81 

Insurance 

Business     73,  186 

Personal     71 

Real  estate    27 

Insurance  proceeds   3,  118,  128 

Interest 

Deductions 28,  49-50,  130-2,  189 

Income     11,  13,  180 

Information   returns    234 

Paid  by  government 292,295 

Paid   to   government 271,  277,  283 

Tax-exempt     12,  180 

Liberty    Bonds    119-127,179 

Withholding   tax    on 255-264 

Inventories    38-40,  253-4 

Invested   capital    207 

Legacies.     See  inheritance 

Liberty    Bond    interest 119-127,  179 

Credit   for  normal   tax ,_, 16,18,23,147,165 

Credit  for  corporation  income  tax ^ 199 

Loss,  net,  for  year 79-80,  197 

Fire,  storms,  etc.,  theft 59-60,135-8,196 

Non-deductible    82, 85 

Sales   of   capital  assets 81-111,  195 

Thirty-day  clause:  wash  sales 86,  195 

Year  taken 61-62,81,136,195,196 

Married  person,  credits    148 

Returns    212-15,  217-224 

Minor 

Earnings  of,  belong  to  parent 6,  42 

Income    of    225 

Return    218 

Net   income    145,  158,  159,  160,  199,  220 

Nonresident  aliens.     See  aliens 

Notice 

Additional   assessment    274 

Payment   of   tax    278 

Obsolescence    ^_^ 58, 192 

Ownership   certificates    .^.i. 263 

Partner,   income  of    .^ 14-16 

Credits  to   \.^ 16,155 

Partnership,  in  general «._.,^ ^  .^ 158 

Returns    158,  239 

Information 158 

Sale  of  interest   HI 

Withholding  at  source,  from  nonresident 255 

Patents,  income  from  30,  182 

Depreciation   on    . 30,  55,  81 

162 


Pars.   1-166,   Individuals;   Pars.   167-210,  Corporations;   Pars.   211-267, 
General  Provisions;  Pars.  268-304,  Administrative  Provisions. 

Paragraphs 

Payment  of  tax    156-7,  205 

Extension    269-70,  275 

Failure  to  pay  tax 277-8 

Penalties 

Additional   assessment    271 

Failure  to  file  return  (on  time) 268 

Failure  to  pay  tax     277-8 

Fraudulent    returns    268 

Pensions,  as  income    9 

Deductible  as  expense 46,  75,  76,  186 

Personal  Service  Corporation   159 

Income  from    17-18^^  183 

Returns    , 170 

Professional  men 

Expenses 35,  48,  53,  55,  74 

Income     33 

Profit,  see  gain 

Protest 

Interest  allowed  on,  additional  292 

Suits,  necessary  for?   293 

Rates     151-3,  200-203 

Real  estate,  income  from  rent  of 24-29,  181 

Sales  of   81-109 

Receivers     171,  228 

Refund,  claims  for  288-292 

Regulations     298 

Rent,   income    from 24-29,  181 

Business  expense    48,  186 

Reopening  of  cases    303 

Reorganizations;  exchange  of  stock 101-2 

Repairs     25,  53,  188 

Replacement   fund    108-9,  195,  196 

Reserves  for  bad  debts 68,  191 

Returns 

Cash  and  accrual  basis 251^ 

Collectors,    returns    by 268 

Copy  of   299 

Corporation    170-4,  206 

Dividend    ^ 174 

Failure  to  file  268 

Fiduciary     161,  163 

Filed,  when  and  where 171,  238-244,  245 

Forms:     See  heading  forms 

Fraudulent    156,  268,  272,  279,  288,  293 

Husband  and  wife,  returns  by 214-15,  217 

Individuals     212-229 

Information    230-237 

Inspection  of 299 

Partnership     158 

Personal  Service  Corporation 159 

Period  covered  by   246-250 

Less  than  year   146,203,242,250 

Status  for,  how  deterrnined 221 

Withholding  agent,  returns  by 264 

Rights,  income  from  sale  of 100-lOOa 

Royalties    30,  182 

163 


Pars,   1-166,   Individuals;   Pars.   167-210,   Corporations;   Pars.   211-267, 
General  Provisions;  Pars.  268-304,  Administrative  Provisions. 

Paragraphs 

Salaries,  as   income 5-10 

As   deduction    41-45,  186-7 

Non-taxable    7 

Sale  of  capital  assets   81-111,  164 

Services , 33 

Source,  information  at   230-237 

Withholding  at   255-264 

Status  for  exemption    150 

Return     221 

Withholding    265 

Stock    dividends    ^_^ 116-17 

Sale  of   ,. 97-99 

Suits 

By  government   279-82 

By    taxpayer    293-297 

None  after  final  agreement 304 

Taxes 

Computation    of    145-53,  199-205,  208-10 

Credits   against    154-5,  204 

Deductible     ^  . .  .29,  51-2,  133-4,  190 

Payment    of    ". 156-7,  205,  269-70 

Rates     151-3,  200-3 

Withholding   255-64 

Tax-free   covenant  bonds    12,  154,  190,  204,  260-4 

Theft     59,  135,  196 

Traveling  expenses    10,  47,  77,  186 

Trustees:     See  estates  and  trusts 

Understatement  in  return 272 

United  States  obligations    ^ 119-127,  179 

Credits    ^ ^16,  18,  23,  147,  161,  199 

Waiver  of  limitation  on  additional  assessment 272 

Wife,   return   by    214-215,  217,  223 

Salary  of   6,  42 

Withholding  at  source   255-264 

Year  to  report  income   4,  175 

To  deduct  losses    61-2,  81,  136,  195,  196 

expenses    72 


164 


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